Investors who buy dividend stocks can capture profits in two ways. First, these stocks generate income in the form of dividends. Second, there is always the potential of the value of the stock rising in the future. This strategy is a relatively low-risk approach to investing.
Keep reading to learn how dividends work and review some top high-dividend stocks to consider for your portfolio.
How Do Dividends Work?
Here’s a simple example to illustrate how dividends work.
Let’s say you bought 100 shares of a company for $10 each. In this hypothetical scenario, the company pays an annual dividend of $0.40 per share. That equates to a 4% dividend yield. You’ve invested $1,000 into the company and it pays you back $40 per year. You can decide to keep the money, invest in another company or reinvest the dividends into the same company. Certain dividend reinvestment plans will automatically reinvest dividends for you.
How To Calculate Dividend Yield
Here’s a formula for calculating dividend yield:
Dividend Yield = Annual Dividends Paid Per Share / Price Per Share
Generally, you can find the dividend yield in a company’s annual report or in the stock quotes published online by companies like The Wall Street Journal and Bloomberg.
Be Wary of Chasing Yields
Increasing dividend yields could mean the company is very financially healthy. When firms raise their dividends, they pay more out to investors. However, higher dividend yields are not always better. Increased yields over time could mean the stock price is going down. When evaluating dividend stocks, be sure to investigate the price history.
If you want access to dividends without purchasing individual stocks, you might be more interested in dividend mutual funds.
How To Choose the Best Dividend Stocks
The best advice is to choose financially strong companies with solid track records of increasing dividends over long periods. These sectors often offer high and consistent dividend payouts:
- Consumer staples
- Real estate
Focus not only on the dividend yield but also on other factors. Some other features that indicate how well a company is performing include:
- Market capitalization: the total value of a company’s shares
- P/E ratio: a ratio of the company’s share price and profits
- Dividend trends: the trend of dividend yields over time
- Earnings reports: quarterly reports of profit and loss
- Earnings projections: earnings guidance for the future
Top 6 High-Dividend Stocks You Should Consider
Here are a handful of the best dividend stocks that you should consider for your portfolio.
AbbVie Inc. (NYSE: ABBV) is a biotechnology company in the healthcare sector. The company currently offers a solid 3.73% dividend yield. AbbVie has a market capitalization of $263.79 billion and a P/E ratio of 21.41. In 2021, AbbVie earned over $30 billion in gross profits. The consensus of 20 analysts rates ABBV a “Buy.”
Chevron (NYSE: CVX) is a 150-year-old integrated oil and gas company focused on lower carbon operations. It currently offers a 3.38% dividend yield. Chevron has a market capitalization of $337.61 billion and a P/E ratio of 16.14.
3. Iron Mountain Inc.
Iron Mountain (NYSE: IRM) is a Boston-based company that provides storage solutions for digital and physical business assets as well as information management services. It currently offers a 5.00% dividend yield and has a market capitalization of $14.74 billion. The firm’s P/E ratio is 33.20%.
4. British American Tobacco
British American Tobacco (NYSE: BTI) is the tobacco- and nicotine-product company behind such brands as Lucky Strike, Camel and Newport. The company currently offers a 6.87% dividend yield. It has a market capitalization of $99.56 billion and a P/E ratio of 11.87.
5. Outfront Media
Outfront Media (NYSE: OUT) is a New York-based real estate investment trust that provides advertising space on billboards, transit and mobile. The company currently has an attractive 6.02% dividend yield. It also has a market capitalization of $3.35 billion and a P/E ratio of 39.43.
6. Plains All American Pipeline
Plains All American Pipeline (Nasdaq: PAA) is a mid-cap energy company with a market capitalization of $7.75 billion and a P/E ratio of 49.48. Plains’ dividend yield returns an impressive 8.06% to investors.
How Are Dividends Taxed?
According to the IRS, dividends are classified as either ordinary or qualified. Ordinary dividends are taxed just like ordinary income. Qualified dividends are subject to the capital gains tax rate but must meet specific requirements. Each dividend company you invest in should send you a Form 1099-DIV breaking down the dividend into those categories.
Other considerations apply if you receive large amounts of dividends. For example, you must report dividends over the amount of $1,500 on Schedule B (Form 1040), Interest and Ordinary Dividends. For significant dividend amounts, you may also be subject to the net investment income tax.
Here are some key takeaways to consider if you’re going to add dividend stocks to your portfolio:
- Always do your research on any company you might invest in.
- Don’t chase dividend yields alone — consider other critical factors.
- Focus on strong, healthy companies with solid track records.
Buying dividend stocks is an excellent strategy for long-term investors who want to grow their portfolios. Electing to reinvest dividends can produce even more gains over time.
Daria Uhlig contributed to the reporting for this article.
Data is accurate as of May 23, 2022, and subject to change.