Even with apps changing the way we invest, each person still gets into the stock market in their own way. Some investors prefer to purchase stocks that they believe will have the highest chance of increasing in value.
Others prefer stocks that provide regular income in the form of cash dividends. In fact, some people develop their entire investing strategy around the dividend payments some companies offer their investors.
Here’s what you need to know about dividend stocks to see whether they might be a good fit for your financial goals, as well as some of the popular dividend stock options out there.
What are dividend stocks?
Simply put, dividend stocks are stocks that pay dividends. But what is a dividend? It’s a monetary distribution from the company’s profits that is sent to its stockholders to reward them for owning the stock. Companies may pay dividends if they have excess earnings they don’t want to reinvest into the company itself. Many companies do this quarterly, but monthly dividends or some other schedule of dividend payments are also possibilities.
People often like dividend stocks because they consider it a sign of strength that a company has the cash flow to make a payout to its shareholders. Some shareholders follow a strategy of reinvesting those dividends to buy more shares of the stock, increasing their overall investment.
Companies may support this strategy by offering a dividend reinvestment plan (DRIP), in which you buy shares through the company and it automatically reinvests any dividends paid out into more company stock. Brokerage firms may also allow you to automatically reinvest your dividends without having to go through a company’s official DRIP.
Others dividend investors use the payment of regular dividends as a form of passive income to fund their retirement or other needs. In these cases, they don’t reinvest the dividend income into the same stock, but instead deposit it into their brokerage accounts. In other cases, retirees may simply choose to receive an annual dividend check, for example.
How dividends pay out
If you’re interested in dividends, it’s important to understand three dates: record date, ex-dividend date, and dividend distribution date. The company defines the record date and dividend distribution date. Then the stock exchange the company is listed on uses that record date to create an ex-dividend date. It’s usually the business day before the record date.
This is important because as long as you owned the stock before the ex-dividend date, you get that dividend payment as a shareholder. You can even sell the stock on or after the ex-dividend date but before the company pays out the dividend and still receive the payment.
Let’s say you own 100 shares of AT&T stock on Jan. 1, 2021. AT&T declared a 52 cents-per-share dividend on Dec. 11, 2020, with an ex-dividend date of Jan. 8, 2021. Because you own the AT&T stock before the ex-dividend date, you receive the dividend payment on the distribution date of Feb. 1, 2021. 100 shares of stock results in a dividend payment of $52.
Dividend stocks vs. dividend funds
Dividend stocks aren’t your only option to earn dividends. Dividend funds also exist. These are mutual funds that hold dividend stocks. For example, some real estate investment trusts (REITs) earn income from rental payments. They may pay out some of their earnings in the form of dividends. Dividend-focused ETFs (exchange-traded funds) also exist and can be traded throughout the day, unlike mutual funds. Index funds can also hold stocks of companies that pay dividends.
Dividend funds and ETFs pay out the dividends they receive to their fundholders, and they can help if you are aiming for a diversified portfolio. On the downside, someone must manage these funds. Managing those funds results in expenses, which reduces the overall return you receive in one way or another.
If you’re thinking of making dividends part of your investment strategy, there are some important differences to buying individual stocks versus funds.
- You choose which companies you invest in to manage when you receive dividends
- You receive income payments
- You must pay taxes on dividends in the year received unless held in a tax-advantaged account
- Your dividends are not guaranteed
- You can invest in a diversified set of dividend-paying stocks
- You let expert managers make dividend stock choices
- Your returns are reduced because dividend mutual funds have costs to manage them
- Your tax treatment on your dividends may vary based on how the fund purchases and sells stocks
Dividends and taxes
As with most types of income, dividends are usually taxable. The exact tax rate you pay depends on your overall income and the type of dividend you receive.
Qualified dividends, or dividends from stocks you have held unhedged for at least 61 of the 121 days of the period starting 60 days before the security’s ex-dividend date may only be subject to the lower capital gains tax rates. Stocks that do not pass the test are considered ordinary dividends and these require you to pay the higher ordinary income tax rates.
Thankfully, your brokerage should send you a 1099-DIV at the end of the year detailing your dividend payments and whether they’re qualified or ordinary dividends. If you use REITs for real estate investing, be aware the dividends these funds pay may be subject to taxation at ordinary income tax rates. These are usually higher tax rates than you pay on qualified dividends from other investments.
You can avoid or delay paying taxes on dividend payments if you hold your dividend-paying investments in a tax-advantaged account. Traditional IRAs and 401(k)s do not tax dividend payments as you receive them into the account and instead delay the taxation on those earnings until you withdraw the money. When you withdraw the money from the account, it is taxed at your ordinary income tax rate.
Roth IRAs and Roth 401(k)s don’t tax dividend payments at all because you contributed the initial funds to the account on an after-tax basis. Qualifying withdrawals from Roth retirement accounts after age 59 1/2 do not result in any taxes.
How to invest in dividend stocks
Figuring out how to invest in dividend stocks takes time and research. Start by deciding what your goals are for investing in dividend stocks. Once you understand your goals, you can start evaluating investments that may fit those goals.
Using technical analysis can be a valuable way to identify and evaluate dividend stocks. To do this, you must understand some key metrics and terms. To help, we’ve briefly defined some crucial terms below.
Two terms to start with, that are included in the list of popular dividend stocks below, are:
- Dividend: A payment from a company to shareholders distribution profits. The latest dividend payment amount for the stock in question is included in the table below.
- Dividend yield: Dividends paid out over a year divided by the share price. A “good” dividend yield depends on your personal goals, the riskiness of the investment, and many other factors, so you might want to look beyond just a high dividend yield.
More advanced terminology you might want to learn includes:
- Dividend payout ratio (also known as payout ratio): Dividends paid per share divided by the earnings per share
- Total return: Includes all forms of return to shareholders, such as price appreciation, dividends, and interest paid out
- EPS: Stands for earnings per share and is measured by dividing a company’s earnings by its total shares outstanding
- P/E ratio: Stands for the price-to-earnings ratio and is measured by dividing a company’s share price by its earnings per share
To help find stocks that fit your goals, consider using an investment screener tool, such as finviz. You can use screeners to find stocks with specific dividend yields, P/E ratios, EPSs, and more. After you’ve identified potential stocks to invest in, decide how much of each stock you want to add to your portfolio to meet your dividend investing goals.
You can use an investing app, such as Stash, to purchase the dividend stocks you want. Stash is helpful because it allows you to buy fractional shares if you don’t have enough cash to buy an entire share due to a high stock price. 1 You can also set up automated recurring investments if you want to add to your dividend stock position over time.
15 popular stocks that pay dividends
Dividend stock investors have coined a couple of terms to categorize companies that have achieved certain feats when it comes to their valuation and dividend track record. These include:
- Dividend kings: Companies with a market cap (the total market value all the company's shares of stock) of at least $3 billion that have increased their dividend payments each of the 50 past years
- Dividend aristocrats: S&P 500 companies that have increased their dividends without fail each of the previous 25 years
You will often see people talking about kings and aristocrats when it comes to dividend investing, but stocks with the highest dividends aren't the only ones to investigate. Below is a list of 15 popular stocks that pay dividends to help you start your dividend stock research. Considering these, among others that fit your goals, might help you find dividend stocks you want to invest in.
|Company||Symbol||Dividend king or aristocrat?||Dividend||Dividend Yield|
|Altria Group||MO||Dividend king||$3.60||8.17%|
|Carlisle Companies, Inc.||CSL||No||$2.16||0.91%|
|Chevron Corp.||CVX||Dividend aristocrat||$5.36||4.68%|
|Coca-Cola Co||KO||Dividend king||$1.68||3.03%|
|International Business Machines Corp||IBM||Dividend aristocrat||$6.56||5.62%|
|Johnson & Johnson||JNJ||Dividend king||$4.24||2.65%|
|Procter & Gamble Co||PG||Dividend king||$3.48||2.34%|
|WP Carey Inc||WPC||No||$4.21||5.32%|
All rates and numbers are accurate as of Nov. 28, 2021.
How do I make $500 a month in dividends?
If you want to receive $500 every month, you would need to own enough dividend stocks to have at least one that pays out dividends in every month of the year. Once you identify that list of stocks, then it’s a matter of some basic math and purchasing the proper number of shares.
First, look at the dividend payouts in a given month. Then take $500 and divide it by the dividend payout to figure out the number of shares you need of that stock to earn the $500 dividend that month. That’s how many shares you would need to purchase. You would need to repeat this process with each month of the year.
Is dividend investing a good strategy?
Dividend investing might be a good strategy if it fits your personal finance goals. Some people may choose to reinvest dividends to grow their portfolio while others use dividend payments as income.
However, all investing, including dividend investing, comes with risks. Companies are not forced to pay out dividends and could stop their dividend payouts at any time. If you rely on those dividends as income, this could pose a significant risk to your investing strategy or financial situation.
How long do you have to hold a stock to get the dividend?
Figuring out if you should receive a dividend from a stock is straightforward. When a company announces a dividend date, it sets a record date. Then the stock exchange that the stock is traded on uses that record date to set an ex-dividend date. The ex-dividend date is usually one business day before the record date.
To receive a dividend payment from owning the stock, you must hold it before the ex-dividend date. If you purchase the stock on the ex-dividend date, you will not receive the current dividend payment. However, you should receive future dividend payments as long as you are still a shareholder before the next ex-dividend date.
Figuring out exactly how to invest money can be difficult when you have so many options to choose from. Whether they are short- or long-term investors, people looking for a stream of income may narrow down their options if they decide to invest in dividend stocks or dividend funds.
Before you decide to become an income investor and get into dividend stocks, make sure they help you meet your investing goals. If they do, then take the time to research the best dividend stocks or funds for those specific goals.
- Get $3-$300 in free stock when your account is approved*
- Invest in 1000s of stocks and ETFs with fractional shares—no account minimums
- Follow friends in a social feed and learn from a diverse community of investors
- * Free stock offer valid for U.S. residents 18+. Subject to account approval.