But, although high-dividend stocks can certainly pad your wallet quarterly (who doesn’t like a little extra cash?), they can also be quite risky.
If the company you’re investing in suddenly shifts around at the director level or reports low earnings, you might not get your quarterly payout (or it could drop significantly).
So, here’s how to find the highest dividend stocks for your portfolio without sacrificing your retirement funds or 401k.
Look for Dividend Stocks
Unfortunately, not all stocks have a dividend.
From the corporate perspective, companies offering dividends have a few things in common. Namely, they’re thriving financially and have enough steady income to share with investors, a sign of looming growth.
The first step in diversifying your portfolio is learning which stocks meet these criteria and offer dividends. Check out this list of the most reliable high-yield dividend stocks in 2021 to begin your search.
As you’re panning through your options, you’ll notice the phrase dividend yield tossed around quite frequently. It’s usually accompanied by a percentage amount (i.e., 1.70%, 5%, 7.26%)
For example, you might see a stock selling at $100/share with a 4% yield. If you own that stock, you’ll earn $4 back annually for that solo share.
The higher the dividend yield, the greater the earning potential.
Select One With a Modest Payout Ratio
The dividend stock terminology can be wildly confusing, especially when you add yet another number to the mix:
Which payout ratios should be on your radar as a retail investor?
Think about it this way.
The higher the ratio, the more the company is planning to distribute to its loyal shareholders (for better or for worse).
For example, a dividend stock with a 40% payout ratio will keep 40% of its earnings (giving it room to expand and grow). The remaining 60% goes out to investors via quarterly dividends per share.
A high-dividend stock will boast a 60-70% payout ratio. But to play on the safe side and avoid a volatile portfolio, cap your ratio at 55%. These slightly lower payouts may not pad your account or add extra zeros, but they’re far more sustainable in the long term.
Analyze the Other Ratios
By now, you likely understand why so many retail investors turn their portfolios over to financial advisors and brokerages. When selecting the perfect high-dividend stock, take a look at their:
P/E (Price-to-Earnings) Ratio
The P/E (price-to-earnings) ratio compares a company’s current price per share to its per-share earnings. In layman’s terms, a P/E of 15 indicates that a company’s value is about 15 times its annual earnings.
The price-to-earnings sweet spot sits at about 15 or less. That way, you can guarantee the stock isn’t overvalued and will continue to grow.
D/E (Debt-to-Equity) Ratio
The D/E (debt-to-equity) ratio divides a business’s liabilities (borrowed funding) by its equity (shareholders, in particular) to describe a company’s leverage. A higher D/E represents a company with greater ownership.
The ideal debt-to-earnings ratio should be no higher than 1.0, a near-equal amount of equity and debt.
The dividend yield describes what’s most important to you:
How much money you’ll earn in dividends per share. In the simplest terms, this number details what percentage of a stock’s price will pay out in dividends.
An ideal dividend yield floats somewhere between 2% and 6%. However, if you’re looking to build a riskier portfolio, slightly higher is acceptable.
Sign Up for a Dividend Stock Website
If diversifying your portfolio means investing in high-dividend stocks, there are two traditional routes to follow:
- Reaching out to the company directly to buy them (also known as a “direct stock plan”)
- Creating an account with a broker who will trade dividend stocks for you (using your money)
However, the digital age opens up a few extra paths for retail traders.
If you’re new to the stock-trading world, sites like Dividend.com and Dividend Investor can offer a crash course in the market. There, you’ll learn about overall yield attractiveness, relative strength, and dividend reliability.
Think About DRIP
By default, a dividend stock will earn you a quarterly (or more rarely — annual) payout in the form of written checks or a direct deposit to all shareholders. But if you want to automatically reinvest these payouts back into your investment portfolio, think about a DRIP.
DRIP stands for dividend reinvestment plan.
Here’s how they work:
Let’s say you own one share valued at $40, and it yields a 5% dividend annually, or $2. On a DRIP, those $2 will go toward buying a fractional share of that same stock. In this case, this reinvestment amounts to a $0.05 extra share, carrying even greater dividend potential.
At this exact rate, the dividend would amount to $2.10 the following year.
DRIPs normally don’t qualify for trade in the traditional stock market. That means you’ll have to start these plans with the company itself (i.e., Honeywell, Johnson & Johnson, or Kellogg Co).
other related articles of interest:
Investing in the stock market is a way to turn your money into more money, but you have to be smart about it.
The stock market is notoriously unpredictable, and a profitable bull market can become a rapidly down-trending bear market (practically overnight).
If you’re still learning the DOW and NASDAQ ropes, schedule an appointment with a financial advisor instead.
They’ll help you build a diversified portfolio, predict upcoming stock surges, execute trades on your behalf, and offer qualified financial advice. A financial advisor can guide you toward the highest dividend stocks for your portfolio.
Image Credit: find the highest dividend stocks by envato.com
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