There’s no doubt that dividend-paying stocks are one of the most popular holdings for most investors. Not only do they pay out a quarterly amount that generates steady returns, but they also help reduce portfolio volatility. They are also regarded as defensive stocks, making them a must-have in uncertain markets.
Whether you’re an aggressive or conservative investor, dividend payers are great additions to any portfolio. But choosing the right one isn’t quite as simple as just looking for any stock that offers a dividend yield. You need to have a solid dividend investing strategy to pull it off.
As the COVID-19 pandemic reaches an end, the stock market should be primed for a comeback run, making it more important to utilize a strong dividend investing strategy.
What Makes for a “Good” Dividend Dividend Investing Strategy
If chasing high yields was all there was to finding dividend stocks, a simple screen to sort them by yield percentage would be all that you needed to do. But the amount of the dividend yield doesn’t tell the whole story; there are a few key metrics you’ll want to look at first before determining whether a dividend stock is “good” or “bad.”
One of the first things you’ll want to take a peek at is the dividend payout ratio. This value tells you what percentage of the company’s income used for dividend distributions. At 100%, the company is paying out all of its income in the form of dividends. The lower the percentage, the safer the dividend is from being cut. The dividend is more likely to be raised in the future.
Some sectors are known for having high payout ratios due to the nature of the industry; therefore, they are exceptions to this rule. REITs have an obligation to pay out at least 90% of its income as dividends. On the other hand, utility companies typically operate with high debt loads, making its payout ratio appear high as well.
You’ll also want to identify whether the stock is considered cyclical or non-cyclical. Non-cyclical stocks are more likely to distribute dividends. They are part of a defensive market sector that sees steady demand regardless of how the economy is performing. Cyclical stocks are subject to more significant ups and downs throughout the business cycle. These dividend payers in cyclical stock sectors are more apt to cut dividends during recessions.
When to Proceed with Caution or Stay Away
It doesn’t take a lot of searching to find dividend stocks with sky-high dividend yields far exceeding the average yield. If you are finding that most dividend payers are averaging between 1% and 3% and stumble across one that pays 6%, you should immediately be skeptical.
Regardless of the company or offered yield, be sure to do your due diligence if you see more than a 100% payout ratio. More than 100% for a payout ratio means the company is paying out more in dividend distributions than it makes in income. Over time, this is an unsustainable trend that usually results in the slashing of dividends and a falling stock price.
However, there are some exceptions to this – companies may be able to “grow” into their dividend payment. For example, if a company expects fast growth due to entering a new market, having a high dividend yield sends a signal to investors that management believes its income will increase quickly enough to pay for the dividend without resorting to debt financing.
There’s a plethora of information when it comes to publicly traded stocks. Sometimes just a quick scan of articles related to the stock you’re looking at can tell you everything you need to know. If you see anything about the company slashing its dividend payment, you can go ahead and cross that name off your list right away.
There’s one last thing to consider regarding high-yield dividend payers – why is the company offering such a large dividend to investors? The money that a company pays out as dividends means that it isn’t there to grow the business or make future investments. A bigger-than-average yield could mean that the company doesn’t see any opportunities for growth – a sure sign to stay far away.
Dividend Winners for 2020
At the moment, the 10-year treasury is offering a paltry yield of just 0.70% – less than 1.0%.
With the risk-free yield so low, there’s a wealth of dividend stocks to pick from now offering at least five times as much. From highest yielding to lowest yielding, here’s our list of the best dividend stocks to hold through the rest of 2020:
| Company | Dividend Yield | Payout Ratio | Sector |
| TOTAL S.A. (TOT) | 8% | 95.8% | Oil & Gas |
| Wells Fargo (WFC) | 7.77% | 69.40% | Banking |
| Rio Tinto Group (RIO) | 7.42% | 67.40% | Metals and Mining |
| Duke Energy (DUK) | 4.52% | 74.20% | Utilities |
| JPMorgan Chase (JPM) | 3.76% | 38.20% | Banking |
Final Thoughts
Dividend-paying stocks are a bit like a Swiss Army Knife for your portfolio – they have a tool available for almost any requirement. Paying out a quarterly amount can help lift a stock during down markets, provide income to conservative investors, or boost annual returns through reinvestment.
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This article was prepared by Daniel Cross, financial writer and analyst.
