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Investing in Dividend Stocks

Updated: Dec. 17, 2021, 2:50 p.m.

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. With that in mind, here's a list of dividend-paying stocks you might want to consider and some of the most important things to look for in top dividend stocks.

Graphic of the benefits of dividend stocks

Dividend stocks can create an "everybody wins" situation that appeases a company and its shareholders.

Five Dividend Aristocrats to buy

The Dividend Aristocrats Index is a great place to find top dividend stocks. Dividend Aristocrats are companies that are both in the S&P 500 Index and have paid and raised their base dividend for at least 25 consecutive years.

Here are five top dividend stocks to consider buying now:

  1. Lowe's (NYSE:LOW): The home improvement giant may not seem like a very exciting stock. And that's true, unless you like dividend growth. The company has raised its dividend an incredible 46 straight years, and, over the past decade alone, has raised the payout a massive 471%. Another important number that's good for Lowe’s: The average U.S. home is 37 years old. The next generation of DIYers will spend a lot of money at Lowe's.
  2. Walgreens Boots Alliance (NYSE:WBA): One of the largest retail pharmacy operators in the world, Walgreens is undergoing a massive turnaround. Its plans will lower costs, increase digital sales, and maybe most importantly, add full-service healthcare clinics in hundreds of its retail locations in the very near term. Becoming a more integrated healthcare company should help make this profitable company even more profitable, fueling its already-generous dividend to even higher levels. With a dividend yield well above 3% at this writing and 45 years of annual payout growth, there's a lot dividend investors can like about Walgreens stock.
  3. Realty Income (NYSE:O): If you're looking for a simple way to invest in high-quality real estate for income and growth, this might be the perfect stock. The company owns a wide array of largely e-commerce-resistant properties, earning strong cash flows from tenants on long-term leases. Realty Income is one of the newest members of the Dividend Aristocrats, having joined the index in January 2020 after reaching 25 consecutive years of dividend increases (along with 50 straight years of paying investors every month).
  4. Johnson & Johnson (NYSE:JNJ): Johnson & Johnson owns a portfolio of excellent brands that make products people need -- specifically healthcare items. In addition to its Band-Aid, Neutrogena, Tylenol, Zyrtec, Benadryl, and Johnson's brands (among others), Johnson & Johnson has massive and steadily profitable operations in pharmaceuticals and medical devices, the combination of which has allowed the company to increase its dividend for 58 years in a row. This diversity across consumer health brands, pharmaceuticals, and medical devices is unmatched and has proven to be a massive profit engine.
  5. Target (NYSE:TGT): In the cutthroat discount retailing world, Target has consistently proven it doesn't have to compete on price to win. For years, it has proven more profitable than its peers, with some of the highest gross and operating margins in retailing. At the same time, its focus on increasing its ecommerce business and expanding in-store offerings has kept sales -- and profits -- growing at a nice clip. With dividend growth at 49 years and counting, dividend investors should put Target on their shopping list.
Did you know...

Dividend Aristocrats are often excellent companies, but you can find great income investments elsewhere, too.

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Four 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.
  4. Clearway Energy (NYSE:CWEN.A): Renewable energy is mostly thought of as a place for growth investors, but it's also a wonderful opportunity for dividends. Clearway Energy, which owns and operates utility-scale wind and solar assets, is a perfect example. The company invests in, acquires, and operates these facilities, selling the power on very long-term contracts to utility companies. If you're looking for a lower-volatility, safer way to profit from renewables, Clearway Energy is an excellent choice.

What to look for in dividend stocks

As promised earlier in this article, 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.

  • 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.
  • Durable competitive advantages: This is perhaps the most important feature. A durable competitive advantage can come in several forms, including a proprietary technology, high barriers to entry, high customer switching costs, or a powerful brand name, just to name a few.
  • High yield: This is last on the list for a reason. A high yield is obviously preferable to a lower one, but only if the other four criteria are met. A high dividend is only as strong as the business that supports it, so compare dividend yields after you make sure the business is healthy and the payout is stable.

Dividend stocks are long-term investments

Even the most rock-solid dividend stocks can experience significant volatility over short periods. There are simply too many market forces that can move them up or down over days or weeks, many of which have nothing to do with the underlying business itself.

So, while the companies listed above should make great long-term dividend investments, don't worry too much about day-to-day price movements. Instead, focus on finding companies with excellent businesses, stable income streams, and (preferably) strong dividend track records. The long term will take care of itself.

How do dividends work?

A dividend happens when a company sends money (or, very rarely, stock) to its shareholders. When a company gets to the point that it consistently earns more than management can effectively reinvest in the business, establishing a dividend policy and sending those excess profits back to investors is a smart move. 

What are Dividend Aristocrats?

A Dividend Aristocrat is a company in the S&P 500 that has paid and increased its base dividend every year for at least 25 consecutive years.

What is dividend yield?

Dividend yield is a stock's annual dividend payments to shareholders expressed as a percentage of the stock's current price. This number tells you what you can expect in future income from a stock, based on the price you could buy it for today, assuming the dividend remains unchanged.

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