One way to boost your overall returns as an investor is to add dividend stocks or funds to the mix. But if you’re just getting started, how do you know which are the best dividend stocks to buy?
There isn’t one formula for figuring out which stocks are the best dividend stocks. However, many investors have stocks they like and their own criteria for figuring which stocks to invest in.
If you’re looking for a good place to start, here are some ideas for the budding dividend investor.
Start with dividend aristocrats
Recently, I had a conversation with Andrew Sather, the founder of The Investing for Beginners Podcast. He’s been investing for a few years, and he recommends starting with dividend aristocrats. These are companies that have offered at least one dividend increase a year for the last 25 consecutive years.
“Dividend aristocrats are some of the best dividend stocks out there,” Sather said. “When a company consistently raises its dividend each year, no matter what is happening with the stock market or the economy, that says a lot about its staying power and fundamental strength.”
You might not see a sexy yield on dividend aristocrats, but they are solid choices and offer access to top dividend stocks over the years.
Here are some of the most interesting dividend aristocrats to consider as you get started as a dividend investor:
1. Medtronic (MDT)
This company focuses on medical devices. When you think of the aging boomer population in the U.S., you can see how the company might do well. Worldwide, the need for medical devices can only continue to grow.
While the dividend yield is only respectable at 2.4 percent ($1.72 per share), the reality is that it has raised its dividend each year for 39 years. As of writing, MDT costs are over $81 per share. Historically, the company has seen solid growth. It is likely to continue, due to its industry, so MDT is likely to continue raising its dividend.
2. Hormel (HRL)
We all need to eat, so it’s no surprise that food giant Hormel is one that offers a chance for dividend returns. Not only is HRL a dividend aristocrat, but it’s a dividend king. This company has been paying consecutive quarterly dividends since 1928. Some of the brands you might recognize from Hormel include Spam and Skippy peanut butter.
The current dividend yield is 1.96 percent, paying 68 cents per share. However, if you are looking for stability, HRL has a lot to offer. Right now, the cost is almost $35 per share, making it affordable as well as a good bet for increasing dividends.
3. V.F. Corporation (VFC)
Looking for a company that’s seen fast growth recently, but is still a dividend aristocrat? One of the best dividend stocks is VFC. This is a global apparel company whose brands includes Lee, The North Face, Nautica, and Vans.
VFC has seen solid profit and share price growth in recent years. As of this writing, the dividend yield is a solid 3.15 percent, paying out $1.68 per share. The share price is about $53.
4. Abbott Labs (ABT)
Abbott Labs is a healthcare company that focuses on a variety of areas, including pharmaceuticals, diagnostics, nutrition, and medical devices. These are all things that people need in order to live healthy lives, so it’s an industry likely to see continued growth.
As of this writing, ABT is close to $45 a share and offers a dividend yield of 2.32 percent ($1.06 per share).
5. Johnson & Johnson (JNJ)
If you’re looking for a company with its fingers in many pies, Johnson & Johnson is one of the oldest and most venerable members of the stock market. The company has existed since 1887 and is one of the best dividend stocks on the dividend aristocrats list.
Because it’s involved in consumer products, pharmaceuticals, and medical devices, the company is likely to maintain stability and the ability to keep growing its dividend annually. JNJ is a little more expensive, at about $128 a share. But the dividend yield is a respectable 2.52 percent ($3.20 per share).
Dividend ETFs: No stock picking
Of course, you don’t have to choose individual stocks to be a dividend investor.
“I try to avoid recommending individual stocks for investors that are just beginning their investment career,” said Ryan Bayonnet, CFP with Hyland Financial Planning. “Individual stocks have increased volatility due to business risk and do not offer investors a diversified option.”
Bayonnet steers his clients toward dividend ETFs with low costs and diversification. Here are his recommendations for dividend ETFs:
6. Vanguard High Dividend Yield ETF (VYM)
According to Bayonnet, VYM includes companies with high yields from a variety of industries, including Johnson & Johnson, Microsoft, and Exxon Mobil.
The yield for this ETF is 2.81 percent, and the net expense ratio is a very low 0.08 percent. It has also seen steady performance since its inception. At the time of writing, the share price is right around $78. (Disclosure: I have a position in VYM.)
7. Schwab Fundamental International Large Company Index (SFNNX)
Bayonnet’s other recommendation for top dividend stocks in an ETF is SFNNX. He likes it because it tracks a large company index, rather than being actively managed. There is also an international option with this ETF.
Unfortunately, this ETF has had some problems, and the trend is somewhat disheartening. However, it is a relatively new ETF, starting in 2007, just before the market crash of 2008.
If you have the risk tolerance for it, you can get it at what might be a really good deal and take advantage of potential gains in the future. The current price is more than $8 per share and the yield is 3.09 percent.
8. SPDR S&P Dividend ETF (SDY)
This is actually one of my favorite dividend ETFs. It has a higher expense ratio than some of the others at 0.35 percent, but you get to take advantage of the S&P 500 index. The yield is also a pretty good 2.50 percent.
Plus, because it’s a broad-based index ETF, you have the advantage of long-term capital gains as well as potential dividend earnings. The share price as of writing is about $88. (Disclosure: I have a position in SDY.)
Other top dividend stocks to consider
You can also consider other dividend stocks. Some of the best dividend stocks might not be aristocrats or ETFs. However, you should be careful, since you don’t know how the companies will fare in the long run.
9. Texas Instruments (TXN)
You remember this company from your days in high school math, using a graphing calculator. TXN continues to evolve as a company, updating its offerings and technology to keep with the times. As long as the company doesn’t become obsolete, it might not be a bad choice.
TXN has a current stock price just above $80 a share and a dividend yield of 2.49 percent ($2.00 per share).
10. 3M (MMM)
This dividend stock was suggested by Andrew Fiebert, a cohost of the Listen Money Matters podcast. Fiebert thinks that MMM offers a chance for dividend growth over time.
“The company has been generous with their dividend increase and the payout ratio has jumped,” Fiebert says. “Still, there is plenty of room for management to increase it in the future.”
Fiebert also notes that 3M has made some acquisitions and is well-positioned to integrate them into its business model.
As of this writing, MMM has a share price of more than $192 and a dividend yield of 2.46 percent, paying $4.70 per share.
Build your dividend portfolio over time
Chances are you won’t see an immediate impact on your bottom line when you start. The key is to use dollar cost averaging to get started, then reinvest the dividends you receive. That’s one reason financial professionals like Bayonnet recommend starting with ETFs: instant diversity for your efforts.
Your dividends will seem like small potatoes at first. However, over time, as you add more shares to your portfolio and reinvest the dividends, your payouts will get bigger.
Eventually, if you get a good start as a dividend investor, you will see the best dividend stocks yield enough income to make a difference.
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