Stocks that pay dividends offer unique benefits that non-dividend stocks can’t match. Dividend stocks offer more stable returns, and investors can collect income from these holdings without having to liquidate their position. As a result, income investors favor these types of investments. However, practically every type of investor can benefit from having a few dividend stocks in their portfolio. The highest dividend stocks offer much larger payouts than average, but sometimes you should be wary of extra-high yields.
Sometimes, companies that are facing difficulties will offer unsustainable dividend payouts to lure in investors. However, these types of stocks are often headed for trouble. Despite the high dividend, you’ll probably lose more from the depreciating value of the stock than you will gain from the lucrative payout. Traders call this type of setup a ‘yield trap’. Dividend investors need to learn how to tell the difference between quality high-yield dividend stocks and yield traps, but that’s easier said than done.
What Is Dividend Yield?
The dividend yield measures a company’s annual dividend payout in comparison to its share price. Usually, the dividend yield is represented as a percentage and you can calculate it as follows:
Dividend Yield = Share Price/Annual Dividend
Since share prices factor into the overall yield, these figures can change over time. Even though the actual dividend payout doesn’t change, changes in stock price directly affect dividend yields.
The Best Dividend Stocks
If you’re investing in stocks for long-term stability and regular dividends, then large-cap stocks are your safest bet. These companies usually have more predictable income flows and better free cash flows. As a result, larger companies can offer consistent dividend payments and stable price action. This is a perfect setup for income investors because it allows them to generate predictable returns from their holdings so they can better plan their finances.
Growth stocks don’t usually pay dividends because they usually reinvest profits into the company. However, mature companies tend to have less growth potential, so they’re more willing to distribute profits to their shareholders by way of dividends. Dividends provide steady returns for investors so they’re more motivated to hold onto their shares. These distributions also help create more demand for stocks that, otherwise, wouldn’t be attractive investments because of low revenue growth. As a result, dividends can be a win-win for both the company and its shareholders.
Large-cap companies usually have massive businesses, so it takes extreme circumstances to affect revenues enough to disrupt dividend payments. However, small and mid-cap companies have less room to breathe because they’re smaller. A slow quarter or operational hiccup could easily disrupt revenues enough to affect dividends, so there smaller companies present more inherent risks than their larger counterparts.
Dividend Payout Ratio
The dividend payout ratio measures the total sum of paid dividends in relation to a company’s net income. This ratio represents the percentage of earnings that are returned to shareholders as dividends.
To calculate the dividend payout ratio, use this formula;
Dividend payout ratio= Dividends paid/net income
If you wish to calculate this per-share basis, you can use this formula;
Retention ratio= dividends per share/earnings per share (EPS)
Growth companies tend to reinvest most of their dividends into expanding their operations or developing new products. Companies that don’t pay dividends have a payout ratio of 0%.
What is Free Cash Flow?
According to Investopedia, free cash flow “represents the cash available to creditors and investors in a company, after accounting for all operational expenses and investments in capital.” This figure accounts for cash outflows, including equipment spending, capital assets, and changes in working capital.
When free cash flow is low, companies can run into problems covering their dividend payments. Low levels of free cash could be a red flag for dividend investors. Dividend payments are often the first place cash-strapped companies look to make cuts.
S&P 500 Stocks With High Dividend Yield
Currently, these S&P500 companies are the highest dividend stocks.
Macy’s Inc. (M)
Macy’s is an international departmental store with its headquarters in Ohio. It is currently one of the largest department stores in the US and has an annual revenue of over $20 billion. For investors, Macy’s is an excellent stock for dividend payments.
This is one of the highest dividend stocks for 2020. Macy’s has a dividend yield of 9%, which is substantially higher than the Retail – Regional Department Stores industry’s yield of 1.24%. This is also higher than the S&P 500’s current dividend yield to investors.
Iron Mountain Incorporated (IRM)
Iron Mountain Inc. is another high dividend-paying S&P 500 stock. It is an enterprise information management services company that has been around since 1951. The headquarters of Iron Mountains is in Boston, Massachusetts and they earn over $3 billion annually.
The dividend yield for this stock currently stands at 7.84%. This is higher than the REIT and Equity Trust – Other industry’s dividend yield of 4%. It is also higher than that of the S&P 500.
CenturyLink, Inc. (CTL)
CenturyLink is another high dividend-paying stock. They are an integrated communications company known for providing communication services to both business and residential customers. CenturyLink has a global presence as its vast fiber optics network is found in all parts of the globe.
The dividend yield for CenturyLink is currently around 6.8%. This dividend yield makes it one of the highest dividend stocks presently available to investors. It delivers a better return than the S&P 500 average at the moment.
Occidental Petroleum Corporation (OXY)
Occidental Petroleum has been around for a century now and is one of the largest oil and gas companies in the U.S. The company actively explores and produces oil and gas, with over 2.7 billion barrels of oil equivalent at the moment. They also operate chemicals and midstream and marketing businesses.
For Occidental Petroleum, the stock dividend yield is currently 7.48%. This is substantially higher than the Oil and Gas – Integrated – United States industry’s return of 0.58%.
High Dividend Stocks: Blue Chip
For the blue-chip stocks index, these top-yielding dividend stocks take the cake.
Exxon Mobil Corporation (XOM)
Exxon Mobil is one of the largest oil and gas companies in the world, with a massive presence in several parts of the globe. The Texas-based company generates over $200 billion in revenue annually, making it one of the leading corporations in the world.
The dividend yield for Exxon Mobil is also very attractive for investors. The dividend yield for Exxon currently stands at 5.25%, which is higher than the 2.55% of the oil and gas sector.
International Business Machines Corporation (IBM)
IBM is another blue-chip stock that delivers excellent dividends to its investors. The American multinational information technology company has a vast presence in over 170 countries around the world and generates billions of dollars in revenue annually.
The company has a dividend yield percentage of 4.61%, which places it as one of the leading dividend stocks on the Dow. IBM is massive and has very stable businesses, so investors could earn consistent dividends by holding this stock.
Chevron Corporation (CVX)
This is another multinational energy corporation that has massive investments in the oil and gas sector. The California-based Chevron is active in more than 180 countries globally and generates over $150 billion per year.
Similar to Exxon, Chevron has a higher dividend yield compared to the Oil and Gas – Integrated – International industry’s return. Chevron’s current dividend yield stands at 4.26%, compared to the 2.10% of the oil and gas sector.
Highest Dividend Yield Stocks on Robinhood
Robinhood offers a full selection of NASDAQ and NYSE-listed stocks. These are the highest dividend stocks you can buy on Robinhood.
Omega Healthcare Investors, Inc. (OHI)
Omega Healthcare Investors holds several properties in over 30 states across the United States. Their presence continues to expand, as they also hold some investments and properties in the United Kingdom.
This stock has a high dividend yield of 6.19%, which is higher when compared to the REIT and Equity Trust – Other industry’s yield of 4%. The company’s business model is simple as all they demand is for their customers to be able to afford rent. This is relatively certain and allows them to pay dividends to their investors regularly.
Broadmark Realty Capital (BRMK)
Broadmark is a Real Estate Investment Trust (REIT) that boasts one of the best dividend yield percentages at the moment. As a REIT firm, it is required to return a large chunk of its profits back to the shareholders. Hence, the reason why it has a high dividend yield.
While the REIT and Equity Trust industry’s yield of 8.49% is high, Broadmark has a higher yield percentage. At the moment, Broadmark’s dividend yield of 11.33%. Thus, investors in this company will receive most of the profit as dividends thanks to the current tax laws.
Enviva Partners LP (EVA)
Enviva is the largest producer of industrial wood pellets in the world. The pellets are renewable and sustainable energy sources that help generate electricity and heat. The Maryland-based company has one of the best dividend yield ratios at the moment.
The company’s current dividend yield percentage stands at 7.1%. This is a substantial return for investors despite the company’s continued expansion into the UK and Europe at the moment. Similar to the other stocks reviewed in this post, Enviva could be an excellent dividend stock to buy and hold for 2020.
More on the Best Dividend Stocks
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