When it comes to buying any stock, we always want to know what the best is.
What’s the best value stock?
What’s the best growth stock?
What’s the best technology stock?
The same goes for the best dividend stock. If we’re going to invest money into something, we want to make sure it’s the best.
This page is where I compile the best dividend stocks for each month.
Some people like to invest only in Blue Chip Stocks. The DOW has been around for over 100 years and is a reliable source for industry leading stocks.
Others want to look at the Dividend Aristocrats. They’ve been raising their dividends for over 25 years and are always sound investments.
The markets are constantly changing.
Stocks that are the best one month may not be the next.
Before getting into what the best dividend stocks are, let’s cover a few basics first.
The Definition of a Dividend Stock
A dividend is the distribution of a part of a company's earnings to its shareholders.
The dividend is most often times in the form of cash but can also be more stocks. Distribution of extra stock as a dividend is also referred to as a stock split.
This means that stock in a company that pays a dividend is, you guessed it, a dividend stock.
Cash dividends are usually paid out once a quarter. There are some companies that pay out once a month or even once a year. But, quarterly is the most common practice.
Each company sets its own payout schedule and the date to distribute the dividend.
Not every company pays a dividend, though. Some prefer to reinvest their earnings back into the business.
Companies can also change their dividend policy at any time. They may increase the payout some years. Other years they may decide to reduce it.
Some companies may decide to cut it one year and then start paying again the next.
Part of finding the best dividend stocks is taking all these possibilities into account.
How to Invest in Dividend Stocks
When looking to invest in dividend stocks, the most important thing is the long term health and stability of the dividend.
Those dividends are a key part of our income snowball and we don’t want them disappearing.
A healthy dividend means a healthy and growing business. By making sure the dividend is safe, we’re making sure the company paying the dividend is safe.
When looking for the best dividend stocks we follow the 7 Truths of Dividend Investing.
That means there are a handful of metrics we’re analyzing to decide if this is a stock worth investing in.
1. Dividend Yield
A high yield means the company is paying out a good dividend.
Higher yields typically lead to better performance.
A higher dividend yield doesn’t always mean a better stock, though. Sometimes companies pay out too high of a dividend and end up paying more than their actual earnings.
We are able to determine that by our next criteria…
2. Payout Ratio
The payout ratio is the stock dividend divided by earnings.
A higher payout ratio means the company is paying out most of their earnings as dividends.
A high payout ratio is OK up to a certain point. Once that number starts creeping up above 60% and 70%, there is cause for concern.
Unless the earning start growing, a high payout ratio means the dividend is at risk.
Which leads us to our third metric.
3. Earnings Per Share and Dividend Growth
Has the company been growing long-term?
We are able to determine this by the history of their EPS and dividend growth.
If both have been growing by a healthy percent over the last 5+ years, there is a good bet they’re going to keep on growing.
The beta of a stock determines how volatile it is relative to the market.
A beta of 1 means the stock is as volatile as the market.
History has shown a lower beta means better performance over the long term.
When analyzing stocks, the lower the beta the better.
5. Dividend History
A long history of paying out dividends without a cut or pause is a very good sign.
This shows the company's dedication to a continued dividend.
Dividend Aristocrats are so highly regarded because it’s a select list of companies that have been raising their dividend for over 25 years.
The longer the history, the safer the dividend.
What Dividend Stocks to Buy
Once you’ve got your list of the best dividend stocks, it’s time to buy.
But what stocks do you buy?
Of course higher on the ranking list is better, but you don’t want to put all your eggs in one basket.
One of the truths of dividend investing is strength in diversity.
You want to invest in many companies to diversify your risk.
Investing in at least 30 different stocks is a pretty good rule of thumb. This reduces your risk down to a level almost equal to the S&P 500.
But, there are a couple other criteria you should follow when building out your dividend stock portfolio.
1. No more than 5% in any one company
If you start to get above 5%, that one stock could dominate the performance of your portfolio.
Best to keep any individual holding below that 5% line.
If the performance of the stock pushes it above that 5%, great! Just don’t invest any new money into it.
2. No more than 5% in any one sector
This is like the other 5% rule.
There are roughly 11 major sectors in the market:
- Basic Materials
- Consumer Cyclical
- Consumer Defensive
More than a 20% investment in one sector means it could dominate the performance of your entire portfolio.
Stocks within a sector have a tendency to move together. If you’ve got over 20% in Energy and it starts dropping, your portfolio is going to take a major hit.
That’s it for the basics. You know how the best dividend stocks are chosen. You also know which dividend stocks to buy.
Now let’s get to the best dividend stock reports.