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Dividend Stocks – Choosing the Right High-Yielding Stock

Dividend stocks are the share of profit that companies pay to their shareholders from the revenue earned. Companies that consistently pay dividends are considered financially stable; therefore, their stock prices rise over time which further boosts investor confidence. Additionally, these companies increase their dividend payout over time, thus adding to the benefits.

There are a couple of benefits of owning dividend stocks primarily being the monthly payout which finances the monthly expenses and is a great convenience. Apart from that, a dividend is a commitment that it has to be given out every month and the company would not promise it if it was not serious about it. If you are not dependent upon your portfolio for your income, then you can put the dividend to work and earn compounding incomes by reinvesting the payout by buying additional shares of the stock. Being at lower risks, dividend stocks are appealing to both the younger generation as it helps to generate wealth with the power of compounding and helps the older generation for building a steady income in retirement.

Low-interest rates have been looming over the horizon for quite some time now as the markets have become more volatile. It is a matter of concern for many investors, such as retirees, who have invested in these stocks to earn money to fund their lifestyle and others who may have a preference for these assets because of low risk. Some investors have ventured to put their money in the highest yielding stocks because of poor returns from the so-called “safe” assets. This may look like an attractive plan but is actually a risky strategy.

Dividend stocks are preferred by a savvy investor because of the stability in income and growth potential offered by these stocks. Many consider that if a stock has a higher yield, then it is a better buy. However, an aware investor knows that an unusually high yield is a matter of concern and may not run for long. Many companies, including CenturyLink and Seagate Technology, have managed to hold a position on the list of top-yielding S&P 500 dividend stocks. There have been new entrants in the market some of whom some are becoming trailblazers. The following can be considered as the 7 best dividend stocks with their a pproximate dividend yields.

CenturyLink: 10.7%
Seagate Technology: 7.4%
Macy’s: 7.4%
Mattel: 7.0%
Apple Hospitality: 6.2%
L Brands (NYSE: LB): 5.7%
Kohl’s: 5.6%
HCP (NYSE: HCP): 5.5%
Besides these, AT&T: 5%, Ford: 5.3%, and STAG Industrial: 5.2% can also be included if one were to compile a list of the top 10 or top 20 dividend stocks to choose from.

There are various criteria through which one can run these stocks to gauge your best choice.

Criteria 1

The payout ratio gives an idea about the fraction of a company’s profits which are being used to pay-out the dividend. Though this may not be the correct yardstick, it is a swift way to measure the sustainability of the dividend. It is calculated by dividing the company’s last 12 months of net income by its total dividend payout. CenturyLink offers the highest payout at approximately 200% followed by Mattel and Macy’s at nearly 100%. However, be cautious of investing as they are paying more than what they are earning in net income. One can consider Ford or Kohl’s with payout ranging from approximately 60% to 70%.

Criteria 2

The growth potential of a company ensures that the company is capable of sustaining its payout ratio. No long-term return can be paid only with a steady profit stream. One should look at the historic growth rate as well as the company’s forecast about future growth. Macy’s and Kohl’s have logged growth earnings at nearly 4% to 5% while having projections of 8% to 15% over next 5 years. Companies like AT&T and L Brands, the company which owns Victoria’s Secret and Bath & Body Works, have managed to keep moving in the right direction. Ford’s current position seems fine; however, future growth predictions may not be so promising.

Going through the current motley group of companies with current payouts and future growth potential we arrived at top 5 dividend stocks to buy. Macy’s, Kohl’s, and L Brands are able to make their dividend payouts today and can show sustainability when they get a better handle on their retail businesses and e-commerce. Instead of trying to go between the two extremes of high payout and less growth potential or less payout and high potential, one would like to place a finger on stocks that place the investor in a safe position. Apple Hospitality is the owner of hotels under the Marriott and Hilton banner. They are steadily growing their chain of hotels in cities which sets the stage for future growth leading to payout hike. Similar to this there is STAG which owns warehouses in 37 states. It yields an approximate of 5.2%; however, the big deal is that its top tenants are prominent courier companies such as DHL, Fed Ex, and others. Apart from diversification, STAG has also been able to garner a steady growth in the last 4 years with payouts at approximately 84%.

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