Top 5 Dividend Stocks to Consider

Did you know that dividends have been responsible for one-third of the returns offered by S&P 500 since 1945? Also, leading investor Warren Buffett is known to favour stocks that have a history of paying dividends. More than half of his holdings comprise of dividend stocks.

What makes dividend stocks attractive is that they are considered a good hedge against inflation. When you buy a dividend stock you get dividend payments as well as a chance to benefit from any appreciation in the share price. You can also use the dividends to buy more stocks and enhance your portfolio. Investing experts like Benjamin Graham advocate buying dividend stocks since they help cushion price declines in other assets in your portfolio.

Things to Know Before Buying Dividend Stocks

• For receiving the dividend pay-out, you must be a shareholder on a specific date preannounced by the company’s board of directors. Stocks that are trading ex-dividend do not entitle you to receive the most current dividend pay-out.
• The dividend should not be the sole criterion for choosing stocks that you wish to invest in. It’s important to consider other factors like share price trends and price to earnings (P/E) ratio.

High Dividend Yield Stocks

Many traders tend to choose stocks that offer a high dividend yield, which is represented by the annualised dividend as a percentage of the share price. This means that a higher yield can result from a decline in the share price, which may be indicative of financial troubles at the company. This is why experienced traders do not consider the dividend yield as the only factor for selecting a stock. Instead, they check the factors driving high dividend yield.

Tips to Avoid Falling in the Dividend Yield Trap

• Compare the dividend yield of a company with that of its peers. If it is significantly higher, it may be a sign of avoid investing and investigate further.
• Check the pay-out ratio, which shows how much of a company’s net earnings are paid as dividends. This ratio will help you gauge the company’s ability to sustain the dividend payment in the future.
• Check the company’s dividend history both in terms of yield and pay-out growth to get a better idea.
• Stay abreast of the quarterly announcement of results. If the company exceeds expectations or raises its outlook, it means its financial health is improving. This gives more confidence in its ability to pay dividends.

Investing in Dividend Aristocrats

Did you know that the S&P 500 has a Dividend Aristocrats index ? It includes companies that have consistently raised their annual dividend for at least 25 consecutive years and have a minimum market capitalisation of $3 billion? These companies have exhibited their ability to effectively manage their capital, besides earning healthy profits and adding to their cash flows over time. The consistent increase in dividend pay-outs is also an indication of the company’s ability to overcome the ups and downs in the economic and business cycles.

The Dividend Aristocrats index includes companies from the following sectors:

• Materials
• Consumer staples
• Consumer discretionary
• Healthcare
• Financials
• Industrials

Dividend Kings are Attractive Too

Investors looking for even better dividend performance stocks can choose from the 43 Dividend Kings. These companies have increased their dividends for 50 consecutive years.

Dividend kings include companies from the following sectors:

• Consumer goods
• Industrials
• Healthcare
• Financials
• Utilities

Top 5 Dividend Stocks

A. Ecopetrol SA (EC) – Dividend Yield: 25.4%

The largest oil company in Colombia, Ecopetrol, is also the highest dividend payer. With the government being its major shareholder, there certainly is incentive for high dividend payouts. Plus, prospects are bright for the company, given that it controls 100% of Colombia’s refining capacity, while also boasting numerous power distribution assets. Ecopetrol boasts a whopping 25.4% in dividend yield.

B. Horizon Technology (HRZN) – Dividend Yield: 11.53%

A business development company focused on the technology, sustainable energy and life sciences industries, Horizon Technology’s stock has returned 131% over the past decade. The company’s fundamentals appear strong, with its earnings growing 5% in five years to 2023, above the industry average of 1%. The share price, which is lower than that of its top rival, Hercules Capital, offers an opportunity to benefit from the high dividend yield.

C. Ares Capital (ARCC) – Dividend Yield: 9.32%

Another business development company, Ares Capital focuses on lower-middle market firms from a wide range of industries. What makes the company attractive is that Warren Buffet owns a stake in it. Plus, the stock has been outperforming the Invesco S&P 500 Equal Weight ETF, SPDR S&P 500 ETF Trust, and Vanguard S&P 500 ETF.

D. Altria Group (MO) – Dividend Yield: 8.95%

One of the largest producers and sellers of tobacco, cigarettes, and associated products in the world, Altria Group has consistently raised its dividend since 1995. Despite potential threats from the vape and marijuana sectors, the company is unlikely to falter anytime soon. The company has thrived by raising prices in the face of declining volumes.

E. Hercules Capital (HTGC) – Dividend Yield: 8.52%

This specialty non-banking lender invests in rapidly growing start-ups. Being a business development company, Hercules Capital is required to pay out 90% of its total taxable income each year to shareholders as dividends. Plus, it has a strong track record of operational performance, with the stock returning 230% over the 10 years to 2024.

Key Takeaways

• Dividend stocks are considered good hedges against inflation.
• The pay-out ratio shows how much of a company’s net earnings are paid as dividends and helps gauge the ability to sustain dividend payments.
• High dividend yield can be a result of declining share price as well.
• Dividend aristocrats and dividend kings have consistently paid dividends for several years.
• Dividend aristocrats have raised dividends every year for at least 25 years.
• Dividend kings have raised dividends every year for at least 50 years.

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