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Dividend Stocks

Guide to Investing in Dividend Stocks

Whether you're new to investing or you've been in the game for a while, you've probably heard the advice: diversify your portfolio. It's never a good idea to put all your eggs in one basket, especially when it comes to investing. One significant dip and you could lose a majority of your investment.  

When you're considering what to invest in, you want to look for a variety of different kinds of investments. Dividend stocks are a very safe and secure investment type to consider adding to your portfolio. 

Dividend stocks are essentially a great way to get rich slowly.  

What Are Dividend Stocks? 

Let's start off with the basics; what are dividend stocks? 

Dividend stocks are a type of stock you purchase from companies that pay out dividends to their stockholders. Each quarter, you receive a small payment for every share of a dividend stock you own. 

The reason dividend stocks are so powerful is because the investor receives a small amount of money, consistently, and over a long amount of time. Dividend stocks are a long-term game. As an investor in dividend stocks, you want to look for companies that have a history of success and consistently high dividend payouts. 

Why Invest In Dividend Stocks? 

The answer is simple: dividend stocks are a safe investment. 

The stock market can be volatile, meaning you're taking a risk with your money when you invest. By investing in dividend stocks, you're lowering that risk. 

Dividend stocks are typically those of more established companies. In contrast, younger, faster-growing companies are reinvesting investor money into the company, instead of returning it to investors in the form of dividend payouts. 

Dividend stocks, because they are part of more mature companies, tend to be less volatile than other stocks and they're able to weather recessions and crashes with better success. 

Which Dividend Stocks Should I Buy? 

Now that you understand what a dividend stock is, you probably are wondering which dividend stocks to buy. As with every investment, there are some dividend stocks that are a better investment than others.  

How do you know which those are? There are a few important factors to look at when choosing which dividend stocks are right for you to purchase. 

Many investors' first reaction when looking to purchase dividend stocks is to look at their yield. The yield is the ratio of the annual dividend compared to the current share price. Yield is expressed as a percentage.

While a higher yield percentage is valuable in terms of dividend stocks, it's not the most important factor. It's also important to assess dividend consistency and company growth over time. For example, you'll find many companies with dividend yields above 5%. But, then there's Johnson & Johnson, which pays a dividend yield of 2.6%. That sounds low, but when you see that the company consistently pays dividends and has increased its dividend for 54 consecutive years, you can see the wisdom of investing in lower yield, safe dividend stocks.  

Dividend stocks are intended to be slow growing and consistent, so reliability is often more important than a high yield.   

If you're new to investments, you have an even safer option than dividend stocks. Instead of investing in dividend stocks from just one company and risking a failure, you can look for ETFs that specialize in dividend stocks. 

If you're still learning about investing, be sure to read through our articles on Dow stocks in addition to the below articles on dividend stocks. 

Article Index

Dividend-Paying Stocks: Some of the Best Bets for 2013

By , Money Morning -

Investors who shy away from dividend-paying stocks next year because of higher taxes will miss some of the best income sources of 2013.

Plus, there's a good chance many investors will miss the biggest dividend tax hit.

U.S. President Barack Obama, who earlier had suggested raising the dividend tax on those earning $250,000 or more, now says he wants to increase the tax on those earning $400,000 or more. Republicans have suggested raising the dividend tax on those earning $1 million or more.

Many investors wouldn't be affected by either proposal: Among Americans who receive qualified dividends - those taxed as capital gains, not regular income - 48% make less than $250,000 a year.

And there are some stocks that will be relatively immune to the fiscal cliff tax effects.

For those who will keep their money in dividends, we've highlighted some of the best picks among dividend-paying stocks for 2013, as well as some you'll want to avoid.



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Don't Miss These Last Special Dividends in 2012

By , Money Morning -

If you missed out on the rush of special dividends in 2012 or simply want to reap further rewards, there's still time to cash in.

That's because even if a fiscal cliff deal is reached, tax rates on dividends will probably still increase. If you add in the investment surtax included in U.S. President Barack Obama's healthcare bill, the top tax rate on dividends could almost triple next year, from 15% to 43.4%.

That is why companies are looking to help out investors in the way of special dividends in 2012.

"Tax rates on dividends are never going to be better," said Steve Joyce, CEO of Choice Hotels International Inc. (NYSE: CHH), on its last earnings call. "I don't know how much worse they are going to get, but they are going to get worse."

Special Dividends in 2012

Special dividends offer investors the chance to cash in on a large dividend payout before it's taxed at a higher rate, plus investors will enjoy higher share prices as special dividend-paying stocks get a bump from the news.

More than 420 special dividends have been announced just in November and December, which will soon exceed the 433 paid in all of 2011, according to S&P Capital IQ.

And it's not just special dividends that are helping investors - regular dividends are being altered as well.

Wal-Mart Stores Inc. (NYSE: WMT) announced its fourth-quarter dividend payout, originally scheduled for Jan. 2, will be paid on Dec. 27, and Costco Wholesale Corp. (Nasdaq: COST) and Oracle Corp. (Nasdaq: ORCL) also moved up their first 2013 dividend payments.

Costco not only paid out its first dividend of 2013 in December, it also issued a $7 per share special dividend, totaling $3 billion, to be paid on Dec. 18.

Wynn Resorts Ltd. (Nasdaq: WYNN) was another company in the past two months to announce a special dividend. Along with Wynn's $750 million dividend, some of the biggest payouts have been Brown-Forman Corp's (NYSE: BF.B) $853 million payout, a $1.1 billion payout by HCA Holdings Inc. (NYSE: HCA) and a $1.6 billion dividend by LyondellBasell Industries NV (NYSE: LYB).

Dozens of other companies have also rewarded shareholders.

"It's like a nice end-of-the-year gift," Jay Wong, a Los Angeles-based portfolio manager for Payden & Rydel, a money manager that manages $75 billion told The Wall Street Journal. "We anticipate that some others will probably issue special dividends before the end of the year, when they get a better sense of what's going to change in the tax structure and they assess their financial health."

So where can investors find the next payout?

To continue reading, please click here...

Risky Dividend-Paying Stocks to Avoid

By , Money Morning -

Investors have had to endure a lot of turbulence and volatility this year, but it's been a very good year for those who invest in dividend-paying stocks.

In the third quarter, dividend increases by U.S. companies amounted to $8.8 billion, according to S&P Dow Jones Indices.

During the quarter, there were nearly 440 dividend increases, up more than 25% from the third quarter of 2011.

Companies that aren't in the S&P 500 also are among those sharing the wealth. The percentage of non-S&P 500 common issues paying a dividend again increased, to 43.4% in the third quarter from 42.7% in the second quarter, 41.7% in the first quarter and 41.4% at the end of the fourth quarter of 2011.

Even with all the positive news for dividend-paying stocks, there are some that are best avoided. Here are a few to keep out of your portfolio.



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2013 Dividend Stock Forecast: The Road to True Wealth Starts Here

By , Global Investing Specialist, Money Morning -

If you listen to the press, Taxmageddon is going to be a "nightmare" for dividend stocks.

There's only one problem with this scary story: It isn't true.

Of course, I'll be the first one to tell you I'm not in favor of higher taxes on dividends.

And it is true that if we fall off the "fiscal cliff" taxes on dividends will revert to the full income tax rate of each individual taxpayer.

For the top taxpayers that means the top rate on dividends will rise from 15% to 43.4% if dividends become fully taxable again.

However, that's not as bad as it sounds, which is why I believe dividend stocks will remain the place to be in 2013.

Here's why.

First institutional holders of dividend stocks are taxed at their own rate so they did not benefit from the 2003 cut in dividend taxes. That means they won't suffer from a new increase.

And even among individual investors, many have their investments in IRAs or 401(k )s or other tax- deferred accounts. These holders will continue to receive dividends that won't be immediately taxed.

As for those on more modest incomes, perhaps being retired and living mostly on their dividend income, they will pay taxes only at 15%, 25% or 28%.

These are the thresholds which have been indexed for inflation since 2001, meaning the vast majority of tax payers will never get close to the 43.4% figure that makes for great scary headlines.

But it's not just all about tax rates. There are other reasons why savvy investors should continue to invest in dividend stocks in 2013.

One of them is Barack Obama...

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Three Dividend-Paying Stocks Likely to Increase Payout

By , Contributing Writer, Money Morning -

One reason investors are scared silly over fiscal cliff 2013 is the potential tax hike that will affect investing in dividend-paying stocks.

If Congress doesn't act the rate on dividends will revert to the ordinary income rate, which tops out at 39.6%, after it was lowered to 15% during the George W. Bush administration.

"It's a foregone conclusion the rates are going up -- it's just a matter of how high they go," Todd Lowenstein, a money manager with HighMark Capital Management Inc. told Bloomberg News.

But history shows dumping dividend-paying stocks because of higher tax rates is a losing game.

Even if tax rates go up, investors will fatten their wallets on companies that raise dividends because the money compounds over time, essentially paying interest on the interest.

And right now, there are plenty of good reasons for corporations to reward investors with higher payouts.

Why Dividend-Paying Stocks Will Increase Payout

Companies are sitting on $3 trillion of cash and can create badly needed goodwill by showing they're attuned to investor concerns about higher taxes, according to HighMark's Lowenstein.

Plus, if corporate tax rates climb, companies may want to increase their dividend payouts instead of paying more taxes on interest from that cash.

And it's about time, based on the miserly way companies have been treating investors.
Companies in the S&P 500 paid a paltry 27% of earnings to investors in dividends last year, according to research from Goldman Sachs Group Inc(NYSE: GS). Over the past 50 years, the payout ratio has rarely dropped below 40%.

In fact, the best companies are committed to boosting their dividends in even the worst economic times. Many of them are so predictable that you can narrow it down to the very day they'll pay dividends and, in some cases, even the size of the increase.

Three Dividend-Paying Stocks Likely to Pay More

Here are three companies with long track records that will almost certainly raise their dividends in the near future:

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How to Find the Best Dividend-Paying Stocks for You

By , Money Morning -

If you find yourself always on the hunt for the best dividend-paying stocks for your portfolio, that's because one of the most discussed topics in the past two years has been the search for the right income investments.

We all know the story and the problem.

The U.S. Federal Reserve has lowered interest rates to basically zero and has made it clear it intends to keep them there for years. The hope is that this eventually spurs the economy and returns us to a state of economic growth.

While we don't know how the Fed's efforts will succeed given two more years, we do know that it has created near impossible conditions for investors in search of income.

Read More…

These Dividend Stocks Will Be the Real Winners of Election 2012

By , Global Investing Specialist, Money Morning -

With Mitt Romney's debate performance last week, Election 2012 has begun to swing Republican on the presidential side.

According to a recent poll by Rasmussen, in the 11 swing states Romney now leads President Obama by a slim 49% to 47% margin. Collectively, these states hold 146 Electoral College votes, or enough to determine the outcome.

Yet with two more debates still left on the slate, the truth is the fortunes of both candidates will likely swing back and forth right up to the wire.

With 27 days until voters head to the polls it's shaping up to be a photo finish.

For investors, that means next month should be volatile as traders attempt to guess the outcome.

However, the long-term results are what's really important, not only for the "big picture" economy, but for particular companies and sectors that can be expected to benefit from either an Obama win or a Romney win.

After all, there are considerable differences between the two candidates' policy prescriptions.

And as long-term dividend stock investors it is going to be crucial that we take advantage of these differences, repositioning our portfolio when we know the election result so we can optimize its performance through the new administration.

With the race still in doubt, here are 10 dividend stock suggestions from the Standard and Poor's 500 Index -- five for each candidate. The selections for each candidate can be expected to do better if he wins, and should therefore be bought when the election result is known --or perhaps before the election as a hedge against your least favorite candidate winning!

If Obama Wins Election 2012, Buy These Dividend Stocks

The following stocks should benefit should President Obama win re-election:

  • H&R Block (NYSE: HRB). If President Obama wins election 2012, it seems almost certain that taxes will rise, at least for those with incomes above $250,000 and probably for many people poorer than that. In addition, there's likely to be a mass reshuffling of allowances and tax rates, changing the best tax strategies for everyone with any complexity at all in their tax returns.

    This has to be good news for tax preparers, the largest of which is HRB, both directly through their network of offices and indirectly through their TaxCut tax software. HRB has a dividend yield of 4.5%, and a historic dividend payout ratio of 60%.
  • Cliffs Natural Resources (NYSE: CLF). If Obama wins, Ben Bernanke is likely to stay in office as Fed chairman, and be replaced by a like-minded successor when his term of office ends in January 2014. That means interest rates should stay low -- good news for commodity stocks like CLF, an iron ore and coal producer. CLF has been generous on the dividend front, and now pays $2.50 per share, giving it a yield of 6.3%. Its historic payout ratio is about 25%, but that will increase as 2012 has been a tough year.

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The Best Place to Look For Income Today

By , Global Investing Specialist, Money Morning -

It's a good rule of thumb: when stocks yield more than bonds, stocks are the better buy because of the potential for growth.

Believe it or not, before the financial crisis in 2008 that was hardly the case. Going all the way back to 1958, bond yields always outpaced those of stocks.

But thanks to Ben Bernanke and friends, bond yields have been driven into the basement. What's more, the central banks of the world are doing everything in the power to keep them there.

That's why investors are increasingly turning to exchange-traded funds that specialize in dividend stocks as vehicles for income.

This makes good sense for a couple of reasons. First, bond markets aren't very transparent, which makes bond prices difficult to come by, so ordinary investors get ripped off if they buy corporate bonds directly.

Second, in today's markets you will do better in a high-dividend stock ETF--especially one with an international portfolio, than you will in a bond ETF.

Let me show you why that is...

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The Best Dividend-Paying Stocks to Buy Now

By , Money Morning -

Some investors fail to realize that successful investing is a matter of continuous performance, not instantaneous performance.

That's why we like dividend-paying stocks.

Over time, dividends and reinvestment can account for 85%-90% of total stock market returns.

In some cases, the dividends are so steady and increase so much that you actually make more in dividends than you paid to buy the stocks that produce them.

And as inflation concerns grow following QE3, investors need to make sure they are protected.

Money Morning's Global Investing Strategist Martin Hutchinson says dividend-paying stocks offer that protection.

"Do you know what the ultimate investment protection is? It's not gold, and it's certainly not Treasuries. It's dividend stocks," said Hutchinson.

But before you go hunting for the best dividend-paying stocks, let's set some ground rules for evaluating which ones are most valuable.

First, a good cutoff is a stock with a yield close to 3%, preferably higher, and a payout ratio less than 60%. Any higher payout ratio would indicate that the company cannot sustain the dividends, manage debt and grow at the same time.

Second, look for companies that have price/earnings ratios less than 25 and a solid history of paying and increasing dividends.

This establishes a solid benchmark for dividend stocks and their fundamentals. Sometimes a dividend stock can look great because it has a 10% yield, but you have to look at the other numbers to decide if it's a worthy investment.

To avoid those high-yield traps, check out this list of some of the best dividend-paying stocks to buy right now.

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Investing in Dividend ETFs: Want Super Yield? Try These

By , Money Morning -

With the U.S. Federal Reserve intent on keeping interest rates low until at least late 2014, investing in dividend ETFs (exchange-traded funds) is necessary for income investors who are all but forced to consider asset classes beyond money market accounts and U.S. Treasuries.

The interest rates on products are now so piddly that investors are all but preconditioned to view either equities or high-yield bonds as the most viable options for generating income.

By virtue of the anemic yields on CDs and Treasuries many investors are left thinking the yields on usual suspect blue chip dividend stocks are great. The 3.3% yield offered by consumer staples giant The Procter & Gamble Co. (NYSE: PG) is viewed as "good." These days, BP Plc (NYSE: BP) with its 4.6% dividend yield is considered "stellar."

They're just two examples, but BP and P&G prove the point that in today's market "decent" yields are viewed as "great." That is one reality of today's low interest rate environment.

Another reality is that the low yield story has been overdone. To borrow from baseball terminology, the low yield story is in the ninth inning.

On the other hand, the still unheralded super dividend theme is still in its infancy. The good news is investors can easily tap into the super dividend story with the following ETFs.

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Why Dividend Investors Should Worry About an Obama Victory

By , Global Investing Specialist, Money Morning -

I don't have to tell you there is a lot at stake for dividend investors in November.

In fact, an Obama victory could hit income investors with something of a double whammy.

You see, for dividend investors it isn't simply just a matter of higher tax rates, the changes President Obama has in mind may result in fewer dividends paid altogether.

You can chalk it up to the law of unintended consequences.

Let me explain.

Thanks to the Bush tax cuts of 2003, dividends are currently taxed at 15% to individual investors.

The rationale for the change was that dividends are paid from income that has already been taxed once at the corporate level. It means the total top federal tax rate on dividends, including the 35% corporate tax, is currently 45% (the net received is 85% of 65%).

Even with the tax break, that's still higher than the top 35% rate of personal income tax.

That's bad enough, but even if the Bush tax cuts are renewed before the "fiscal cliff" strikes at the end the year, investment income will suffer an additional 3.8% tax starting on January 1 to pay for Obamacare.

That means the total tax on dividends could jump to a whopping 47.2%.



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These Dividend Stocks Offer the Best of Both Worlds—Both Growth and Big Yields

By , Global Investing Specialist, Money Morning -

I want to let you in on a little secret: You really can enjoy the best of both worlds.

With a little bit of digging, you can uncover companies that not only offer growth but pay good dividends as well.

Now admittedly, there has always been something of a perceived conflict between the two.

The classic theory has been that real growth companies need to retain all of their earnings to have the capital to expand, whereas high-paying dividend stocks are simply "too mature" to be considered good growth opportunities.

But here's the thing. This well-worn theory is wrong on both counts.

In fact, the best companies to put in your nest egg are often what I call "heirloom" investments.

Heirloom investments are companies which have not only maintained their dividends for 30 years or more-- but have increased them every step of the way.

For investors, it's like getting growth and dividends all rolled into one.

Take Emerson Electric Co. (NYSE:EMR) for example.

This heirloom investment has increased its dividend every year since 1957. They haven't been trivial increases, either.
If you look at Emerson's dividend record over the last 20 years, you will find that its quarterly dividend has risen from 8.62 cents in the third quarter of 1992 to 40 cents today.

That's a compounded growth rate of 8.0%, far above the average 2.5% consumer price inflation rate during this same 20-year period.

Granted, it may not sound like much in a single year--but over a 20-year period it's the kind of difference great fortunes are made of.

Add Emerson's annual dividend growth rate of 8.0% to its dividend yield of 3.1% and you get an annual return of 11.1%. Over 20 years, that will turn every $100 invested into $820.83.

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Dividend-Paying Stocks: AOL Not the Only One to Raise Payout

By , Contributing Writer, Money Morning -

AOL Inc. (NYSE: AOL) announced Monday it would divvy out $1.1 billion in cash to shareholders, joining the growing group of dividend-paying stocks - although only for brief moment.

AOL will dole out a one-time payment of $5.15 a share to holders of record Dec. 5, for a total of $500 million given out in dividends.

In addition to the whopping and unexpected dividend news, AOL also reported a $600 million fast-tracked share repurchase agreement with Barclays Plc (NYSE ADR: BCS).

The move comes on the heels of a deal inked in April to sell 800 patents to Microsoft Corp. (Nasdaq: MSFT). At the time, AOL assured its plans were "to return a significant portion of the sale proceeds to shareholders."

The move also follows a push from activist shareholder group Starboard Value LP, which had been lobbying for AOL to unload its patent cache and reward shareholders with a dividend and share repurchase program.

Investors applauded the dividend news, sending shares of AOL up more than 3% Monday. The stock has been on a tear, climbing more than 120% year-to-date.

While AOL has only planned a one-time dividend, many other companies in 2012 have announced regular payouts.

Dividend-Paying Stocks: Payouts on the Rise

A number of companies are beginning to recognize just how important dividends have become in this era of low-interest savings accounts and certificates of deposits (CDs) that offer paltry yields.

In fact, dividends, once a trademark of stodgy blue chip companies, are emerging in full force in the tech sector.

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Cisco Systems (Nasdaq: CSCO) is Looking More and More Like a Dividend Stock

By , Contributing Writer, Money Morning -

Since the height of the dot.com boom, the transformation of Cisco Systems (Nasdaq: CSCO) has been extraordinary.

These days, the Silicon Valley Internet giant looks more and more like a dividend stock rather than an explosive growth company.

In fact, last Wednesday, the San Jose-based behemoth increased its dividend rate by a whopping 75% (from 8 cents per share to 14 cents) starting with the present quarter. That gives shares of Cisco a new dividend yield of roughly 3% which among the highest of major tech stocks.

For investors seeking a reasonably safe return and a less volatile investment, a great deal of value can be found in Cisco these days since the company now plans to return half of its cash flow to investors by way of dividends and stock buybacks.

And while the company may not post eye-popping revenue growth year-after-year, Cisco does appear poised to post healthy results and robust cash flow for years ahead.

That means Cisco's dividend will be both safe and stable.

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