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The best dividend stocks are ones that keep paying their dividends over time. When investors buy a stock for the dividend, they count on that dividend to get paid each quarter. It is essential for the investor since the dividend is a source of passive income.
Furthermore, buying dividend stocks can be a necessary part of a retirement plan. Suppose you combine passive income from dividends, social security payments, and retirement plan distributions, then you may have a diversified income stream to fund your retirement.
Investing in dividend stocks is often viewed as more conservative than investing in growth stocks or riskier alternative investments.
But the best dividend stock from ten years ago or even a year ago may not be the best one today. The reason is that economic conditions and businesses change. In this article, we will look at the five best dividend stocks.
What Are Dividend Stocks?
In this period of tech stock investing and bitcoin, some investors may ask what a dividend stock is? Companies that pay a part of their earnings to stockholders are known as dividend stocks. The payment is a dividend and is a return of cash to shareholders. Most dividend stocks come from well-established companies with stable revenue and earnings. In turn, this consistency allows the company to pay a dividend. However, even a long history of paying a dividend is not enough to guarantee future payments. For example, AT&T (T) announced a dividend cut due to a change in business strategy. Hence, it is essential to look at not only the dividend yield but also the dividend safety.
Important Dividend Definitions
There are a few critical and fundamental divided-related finance words to know. These are dividend rate, dividend yield, and payout ratio. Of course, there are other terms to understand, but investors who are just beginning can get started with these three words.
Dividend rate: The dividend rate per share is the actual cash amount paid to stockholders. In the US, most stocks pay dividends quarterly. Hence, the stock will have a quarterly dividend rate and an annual dividend rate.
Dividend yield: The dividend yield is the value that most investors want to see. It is a percentage given by the ratio of the annual dividend rate divided by the current stock price. For this reason, the dividend yield fluctuates as the stock price fluctuates. A high dividend yield is excellent but can mean that the stock price is pressured for specific reasons.
Payout ratio: The payout ratio is a measure of dividend safety. It is the ratio of the annual dividend rate per share divided by annual earnings per share. If this percentage is too high or negative, the dividend may not be sustainable.
5 Best Dividend Stocks Right Now
Verizon (VZ) is number one on this list for two reasons: an excellent dividend yield combined with good dividend safety. First, most investors know about Verizon. The company is a cell phone giant with one of the largest US networks. Verizon operates in a mature market with only two other large competitors, controlling 98%+ of the US wireless market. Verizon has the second largest market share, with over 120 million paid users. The company also has a large broadband business known as FiOS.
Verizon's stock price has struggled this year, and it is down about (-13.4%) year-to-date. This decline has driven the dividend yield up to more than approximately 5%. The quarterly dividend rate is $0.64 per share, and the annualized rate is $2.48 per share. Verizon's dividend is secure, too, since the payout ratio is only about 48%. This ratio means that the likelihood of a dividend cut is low. In addition, it means they can raise the dividend in the future.
Consumers and businesses will continue to need a reliable cell phone network. In addition, higher broadband speed is always a requirement. Verizon can provide both. But since the markets are mature, Verizon will probably be a slow-growing company. However, slow-and-steady is suitable for the dividend.
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- Market Capitalization: $210.57 billion
- Stock Price: $50.86
- Dividend Yield: 5.03%
- Payout Ratio: 47.6%
In our opinion, no list of dividend stocks is complete without Microsoft (MSFT). Almost every investor knows about Microsoft. The company's signature products and services include Windows, MS Office, Xbox, LinkedIn, Bing, Outlook, Azure, and more. Almost every adult directly or indirectly uses one or more of these products.
Microsoft is the second-largest company by market capitalization at over $2.58 trillion. This dollar value is more than the Gross Domestic Product (GDP) of many countries. Microsoft's stock has been on a tear since the current CEO, Satya Nadella, took over. In the trailing 5-year, the total return was roughly 469%, and in the past decade, the total return was about 1,256%. For the year, the stock price is up ~54%.
The current quarterly dividend is $0.62 per share, and annually it is $2.48 per share. Though, one negative about Microsoft is the low dividend yield of 0.72%. What the company lacks in dividend yield, it makes up in dividend safety. The payout ratio is an excellent 27%. Furthermore, Microsoft is one of only two triple-AAA-rated companies by the credit agencies. It is for this reason that Microsoft is often considered one of the best dividend growth stocks.
Microsoft will continue to grow organically and through acquisitions. The company is in the habit of buying smaller tech companies adding to its portfolio of brands, products, and services.
- Market Capitalization: $2.58 trillion
- Stock Price: $343.11
- Dividend Yield: 0.72%
- Payout Ratio: 27.1%
Realty Income Corporation
Realty Income Corporation (O) is the only real estate investment trust (REIT) on this list. The trust owns more than 6,500 commercial properties. Additionally, Realty Income's retail properties are not part of larger retail developments, like malls or town centers, but standalone properties. This fact means that many different tenants can utilize the properties, including government services, healthcare services, and entertainment.
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The REIT's share price is up 14.1% year-to-date. Realty income's current dividend rate is $0.246 per share per month or $3.17 per share per year. Thus, the dividend yield is a healthy 4.16%. REITs usually have higher payout ratios since they must distribute most of their earnings, and Realty Income is no exception. The payout ratio is about 85%.
Realty Income is well-known for its monthly dividend payments. The REIT has paid a dividend since its founding in 1969. That totals 617 consecutive monthly dividends. The dividend has been raised 113 times since 1994.
- Market Capitalization: $40.15 billion
- Stock Price: $70.91
- Dividend Yield: 4.16%
- Payout Ratio: 85.5%
Coca-Cola (KO) is one of the most well-known dividend stocks. Additionally, the company owns some of the most famous brands globally, operating in more than 200 countries. Coca-Cola owns over 20 brands with $1 billion in sales. Significant brands include Coca-Cola, Diet Coke, Fanta, Sprite, Costa Coffee, Powerade, Dasani, Minute Maid, etc.
Coca-Cola's stock price is flat year-to-date. The quarterly dividend rate is $0.42 per share. The annual dividend rate is $1.68 per share. The dividend yield is good at about 3.1%. However, Coca-Cola's dividend safety is lagging, with a payout ratio of approximately 73%. This value is high, but Coca-Cola has consistent revenue and earnings even during recessions. Though, investors should not expect significant dividend increases in the next few years.
Coca-Cola is the market leader in most of its segments. In addition, the market for many of its brands is mature. However, Coca-Cola should grow organically through brand extensions. For instance, the updated Coca-Cola Zero drink is doing well. Coca-Cola will also grow by acquisitions and recently bought Bodyarmor, an athletic hydration drink.
- Market Capitalization: $238.13 billion
- Stock Price: $55.13
- Dividend Yield: 3.05%
- Payout Ratio: 73.2%
For our last stock on this list of five stocks, we include a utility for diversification. Consolidated Edison (ED) is one of the oldest regulated utilities. The company is also a well-known dividend stock that has paid a dividend since 1885. Consolidated Edison provides electricity, gas, and steam in New York City, southern New York, and northern New Jersey. The utility has approximately 3.5 million electricity customers and 1.1 million gas customers.
Consolidated Edison's stock price is up about 8% for the year. The quarterly dividend per share is $0.78. The annual dividend per share is $3.12. Thus, the dividend yield is nearly 4%. However, the payout ratio is high at approximately 73% due to lower revenue and earnings during the pandemic. As NYC's economy recovers, demand should also recover for Consolidated Edison, resulting in a lower payout ratio. But again, investors should not expect significant dividend increases moving forward.
Consolidated Edison's market is mature but growing. As a regulated utility, the company has a monopoly in its service area. In addition, the population of the NYC area continues to grow. In turn, this growth should drive electricity and natural gas demand.
- Market Capitalization: $27.6 billion
- Stock Price: $78.03
- Dividend Yield: 3.97%
- Payout Ratio: 73.0%
Disclosure: Dividend Power is long MSFT, KO, and ED.
Disclaimer: Dividend Power is not a licensed or registered investment adviser or broker/dealer. He is not providing you with individual investment advice. Please consult with a licensed investment professional before you invest your money.
This post originally appeared on Wealth of Geeks.
Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor and blogger on dividend growth stocks and financial independence. Some of his writings can be found on Seeking Alpha, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, Entrepreneur, FXMag, and leading financial blogs. He also works as a part-time freelance equity analyst with a leading newsletter on dividend stocks. He was recently in the top 1.5% (126 out of over 8,212) of financial bloggers as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.