Are high yield dividend stocks worth it?
Stocks and mutual funds that distribute dividends are generally on sound financial ground, but not always. Stocks that pay dividends typically provide stability to a portfolio but may not outperform high-quality growth stocks.
In some cases, a high dividend yield can indicate a company in distress. The yield is high because the company's shares have fallen in response to financial troubles. And the high yield may not last for much longer. A company under financial stress could reduce or scrap its dividend in an effort to conserve cash.
Another potential downside of investing primarily for dividends is the chance for a disconnect between the business growth of a company and the amount of dividends the company pays. Common stocks are not required to pay dividends. A company can cut its dividend at any time.
Sometimes high yield can be misleading since it may indicate a falling stock price instead of an increase in dividend payment. This indicates that the company may have financial difficulties, or the financial market may perceive the stock as less valuable.
If you are looking to create wealth and have a longer time horizon, staying invested in growth will enable you to enjoy longer returns. But if you are looking for a more immediate return and steady cash flow, dividend investing could be the best choice for you.
Stocks and mutual funds that distribute dividends are generally on sound financial ground, but not always. Stocks that pay dividends typically provide stability to a portfolio but may not outperform high-quality growth stocks.
Safe Dividend Stock #1
Ameriprise Financial (AMP) has a market capitalization above $30 billion, with more than 12,000 employees, and more than $1 trillion in assets under management. The company's operating segments include Advice & Wealth Management, Asset Management, Annuities, and Protection (insurance products).
| Stock | Trailing annual dividend yield* |
|---|---|
| AT&T Inc. (T) | 6.3% |
| Verizon Communications Inc. (VZ) | 6.3% |
| Healthpeak Properties Inc. (DOC) | 6.6% |
| Altria Group Inc. (MO) | 8.8% |
- Verizon Communications VZ.
- Johnson & Johnson JNJ.
- Philip Morris International PM.
- Altria Group MO.
- Comcast CMCSA.
- Medtronic MDT.
- Pioneer Natural Resources PXD.
- Duke Energy DUK.
Many investors look to dividend-paying stocks to generate income in addition to capital gains. A high dividend yield, however, may not always be a good sign, since the company is returning so much of its profits to investors (rather than growing the company.)
What is considered a good dividend yield?
What Is a Good Dividend Yield? Yields from 2% to 6% are generally considered to be a good dividend yield, but there are plenty of factors to consider when deciding if a stock's yield makes it a good investment. Your own investment goals should also play a big role in deciding what a good dividend yield is for you.
To generate $5,000 per month in dividends, you would need a portfolio value of approximately $1 million invested in stocks with an average dividend yield of 5%. For example, Johnson & Johnson stock currently yields 2.7% annually. $1 million invested would generate about $27,000 per year or $2,250 per month.
A payout ratio that is between 75% to 95% is considered very high. It implies that the company is bordering towards declaring almost all the money it makes as dividends. This increases the risk of the company cutting its dividends because our formula is forward looking.
Dividend Sustainability
If a company's payout ratio is over 100%, it returned more money to shareholders in the year it earned and may be forced to lower the dividend or stop paying it altogether since overpayment is likely to be unsustainable. A company may endure a bad year without suspending payouts.
Companies that continuously raise their dividends over time are known as "dividend growth companies" because they give investors a steady source of cash. In contrast, high-yield stocks give more significant dividends, but they could be artificially inflated as a result of monetary issues or a drop in stock price.
Not necessarily. While dividend ETFs can offer stable income, their growth potential is generally lower over the long run. That said, dividend ETFs may outperform the S&P 500 during particular time frames, such as during a recession or a period of easing interest rates.
The general preference for investors is capital gains, and generally, shareholders choose dividend income. Capital gains or low-payout firms are preferable for investors as they avoid the periodic distribution of dividends.
Retirement: 70s and 80s
You're likely retired by now—or will be very soon—so it's time to shift your focus from growth to income. Still, that doesn't mean you want to cash out all your stocks. Focus on stocks that provide dividend income and add to your bond holdings.
“Dividend capture strategy” returns are the trading technique of buying a stock just before the dividend is paid, holding it just long enough to collect the dividend, then selling it. If you can sell it for as much as you paid, you have “captured” the dividend at no cost, other than the transaction costs.
Overall, we believe creating a dividend portfolio with 20 to 60 stocks provides a reasonable balance between the need for diversification, a desire to keep trading activity low, and a limited amount of research time to devote to maintaining a portfolio.
What are the three dividend stocks to buy and hold forever?
| Stock | Dividend yield | Dividend growth streak |
|---|---|---|
| Walmart Inc. (WMT) | 1.4% | 50 years |
| Procter & Gamble Co. (PG) | 2.4% | 68 years |
| 3M Co. (MMM) | 6.5% | 65 years |
| Coca-Cola Co. (KO) | 3.3% | 61 years |
In the end, both Coca-Cola and PepsiCo are solid dividend stocks with strong brands and loyal customer bases. The key is to choose the one that best aligns with your investment goals and risk tolerance.
- Giant U.S. cigarette maker Altria has a 9.3% yield and a business that's slowly dying.
- AT&T has a 6.7% yield, a lot of debt, and a dominant business position.
- Healthpeak Properties has a 6.6% yield and owns a diversified portfolio of medical buildings.
| Stock | Dividend yield |
|---|---|
| Coca-Cola Co. (KO) | 3.3% |
| Johnson & Johnson (JNJ) | 3.4% |
| Prologis Inc. (PLD) | 3.7% |
| Realty Income Corp. (O) | 5.9% |
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