Dividend stocks might be an excellent option for investors seeking consistent income. If you’re looking for a reliable source of income, high-dividend stocks can be a good option.
In this article, we have compiled a list of the best dividend stocks you could consider for 2022.
What are Dividend Stocks?
Dividend stocks are stocks that make regular distributions to their shareholders, usually in the form of cash payments.
Dividend stocks can be useful sources of income, but the best dividend stocks can also be excellent ways to increase your wealth over the long term.
However, not all dividend stocks are great investments, and many investors aren’t sure how to start their search.
Click Here to know the Types of Dividends and How Stock Dividends Works
How to Evaluate Dividends
An investor can use different methods to learn more about a company’s dividend and compare it to similar companies.
1. Dividend Per Share (DPS)
As mentioned above, companies that can increase dividends year after year are sought after. The dividend per share (DPS) calculation shows the number of dividends distributed by the company for each share of stock during a certain time period.
Keeping tabs on a company’s DPS allows an investor to see which companies are able to grow their dividends over time.
2. Dividend Yield
Financial websites or online broker platforms will report a company’s dividend yield, which is a measure of the company’s annual dividend divided by the stock price on a certain date.
The dividend yield evens the playing field and allows for a more accurate comparison of dividend stocks: A $10 stock paying $0.10 quarterly ($0.40 per share annually) has the same yield as a $100 stock paying $1 quarterly ($4 annually). The yield is 4% in both cases.
Yield and stock price are inversely related: When one goes up, the other goes down.
For most stocks, a good rule of thumb is to carefully analyze anything above a 4% yield, as it could indicate the dividend payout is unsustainable.
However, there are some exceptions to this 4% rule — specifically, stock sectors that were created to pay dividends, including real estate investment trusts.
It’s not unusual for REITs to pay safe yields in the 5% to 6% range and still have growth potential.
3. Dividend Payout Ratio
Advisors say one of the quickest ways to measure a dividend’s safety is to check its payout ratio or the portion of its net income that goes toward dividend payments.
If a company pays out 100% or more of its income, the dividend could be in trouble. During tougher times, earnings might dip too low to cover dividends.
Generally speaking, investors look for payout ratios that are 80% or below. Like a stock’s dividend yield, the company’s payout ratio will be listed on financial or online broker websites.
How to Invest in Dividend Stocks
Building a portfolio of individual dividend stocks takes time and effort, but for many investors, it’s worth it. Here’s how to buy a dividend stock:
1. Find a Dividend-paying Stock.
You can screen for stocks that pay dividends on many financial sites, as well as on your online broker’s website. We’ve also included a list of high-dividend stocks below.
2. Evaluate the stock
To look under the hood of a high-dividend stock, start by comparing the dividend yields among its peers.
If a company’s dividend yield is much higher than that of similar companies, it could be a red flag. At the very least, it’s worth additional research into the company and the safety of the dividend.
Then look at the stock’s payout ratio, which tells you how much of the company’s income is going toward dividends. A payout ratio that is too high — generally above 80% — means the company is putting a large percentage of its income into paying dividends.
In some cases dividend payout ratios can top 100%, meaning the company may be going into debt to pay out dividends.
3. Decide How Much Stock You Want to Buy
You need diversification if you’re buying individual stocks, so you’ll need to determine what percent of your portfolio goes into each stock. For example, if you’re buying 20 stocks, you could put 5% of your portfolio in each.
However, if the stock is riskier, you might want to buy less of it and put more of your money toward safer choices. If you’re going to reinvest your dividends, you’ll need to recalculate your cost basis — the amount you originally paid to purchase the stock.
The №1 consideration in buying a dividend stock is the safety of its dividend. Dividend yields over 4% should be carefully scrutinized; those over 10% tread firmly into risky territory.
Among other things, a too-high dividend yield can indicate the payout is unsustainable, or that investors are selling the stock, driving down its share price and increasing the dividend yield as a result.
More of the Best Dividend Stocks to Buy
The Dividend Aristocrats aren’t the only place to look. Many excellent companies simply haven’t been paying dividends.
(Or haven’t been publicly traded) for long enough to be included in the index, although they can still make excellent long-term dividend investments.
Here is a list of dividend-paying stocks with characteristics such as excellent brands, loyal customer bases, and favorable demographic trends that are also worth putting on your radar.
See details below about each company.
1. Brookfield Infrastructure Corp (NYSE: BIPC)
Sometimes the best stocks are the ones hidden in plain sight. That’s the case with Brookfield Infrastructure, which owns water, energy, utility, transportation, and communications infrastructure all over the world.
These assets generate steady, recession- and inflation-resistant cash flows, and Brookfield returns a sizable portion to shareholders.
With a dividend yield above 3% at recent prices and a goal to raise the payout 5% to 9% annually, Brookfield Infrastructure is a hidden dividend gem.
2. Microsoft (NASDAQ: MSFT)
As one of the largest companies in the world, Microsoft has steadily increased its sales, and its focus on recurring, or subscription-based, revenue sources is an especially attractive feature for dividend investors.
The company has a solid balance sheet with more cash than debt and a very low payout ratio that leaves tons of room to increase the dividend.
Given its 19-year streak of dividend increases, we wouldn’t be surprised if Microsoft joins the Dividend Aristocrats club soon.
3. American Express (NYSE: AXP)
Financial services such as consumer and business lending are another place to find a handful of top dividend stocks, and American Express is one of the best.
While not a Dividend Aristocrat, AmEx has a decades-long track record of either raising or maintaining its dividend through every economic environment.
That’s a credit to its high-quality lending standards and its focus on higher-income consumers who are less likely to default on their debts during weak economic periods.
This makes it both a safe investment for long-term investors and a reliable source of dividends.
What to Look For In Dividend Stocks
Here are the tools you need to find great dividend stocks yourself.
If you’re new to dividend investing, it’s a smart idea to familiarize yourself with what dividend stocks are and why they can make excellent investments.
Once you have a firm grasp on how dividends work, a few key concepts can help you find excellent dividend stocks for your portfolio.
Payout Ratio: A stock’s payout ratio is the amount of money it pays per share in dividends divided by its earnings per share. In other words, this tells you what percentage of earnings a stock pays to shareholders. A reasonably low payout ratio (say 60% or less) is a good sign that the dividend is sustainable.
History of Raises: It’s a very good sign when a company raises its dividend year after year, especially when it can continue to do so during recessions and other tough economic times such as the COVID-19 pandemic.
Steady Revenue and Earnings Growth: When looking for the best dividend stocks to own for the long term, prioritize stability in the companies you consider. Erratic revenue (up one year, down the next) and all-over-the-board earnings can be signs of trouble.
Check out 25 High-dividend Stocks with their Current Updates
As already said, any dividend stock can experience significant volatility over short periods. So, focus on finding companies with excellent businesses, stable income streams, and (preferably) strong dividend track records.
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