solarseven / Shutterstock.com
Many investors buy dividend stocks to capture profits in two ways. First, these stocks generate income in the form of dividends. Second, there is always the potential of the value of the stock rising in the future. This strategy is a relatively low-risk approach to investing.
Keep reading to learn how dividends work and review some top high dividend stocks to consider for your portfolio.
How Do Dividends Work?
Here’s a simple example to illustrate how dividends work.
Let’s say you bought 100 shares of a company for $10 each. In this hypothetical scenario, the company pays an annual dividend of $0.40 per share. That equates to a 4% dividend yield. You’ve invested $1,000 into the company and they pay you back $40 per year. You can decide to keep the money, invest in another company, or reinvest the dividends into the same company. Certain dividend reinvestment plans will automatically reinvest dividends for you.
How To Calculate Dividend Yield
Here’s a formula for calculating dividend yield:
Dividend Yield = Annual Dividends Paid Per Share / Price Per Share
Generally, you can find the dividend yield in a company’s annual report.
Be Wary of Chasing Yields
Increasing dividend yields could mean the company is very financially healthy. When firms raise their dividends, they pay more out to investors. However, higher dividend yields are not always better. Increased yields over time could mean the stock price is going down. When evaluating dividend stocks, be sure to investigate the price history.
If you want access to dividends without purchasing individual stocks, you might be more interested in dividend mutual funds.
How To Choose the Best Dividend Stocks
The best advice is to choose financially strong companies with solid track records of increasing dividends over long periods. These sectors often offer high and consistent dividend payouts:
- Consumer staples
- Real estate
Focus not only on the dividend yield but also on other factors. Some other features that indicate how well a company is performing include:
- Market capitalization: the total value of a company’s shares
- P/E Ratio: a ratio of the company’s share price and profits
- Dividend Trends: the trend of dividend yields over time
- Earnings Reports: quarterly reports of profit and loss
- Earnings Projections: earnings guidance for the future
Top 5 High Dividend Stocks You Should Consider
Here are a handful of the best dividend stocks that you should consider for your portfolio, according to recent figures from Nasdaq.
AbbVie Inc. (NYSE: ABBV) is a biotechnology company in the healthcare sector. The company currently offers a solid 4.94% dividend yield. AbbVie has a market capitalization of $185.68B and a P/E ratio of 38.68. In 2020, AbbVie earned over $30B in gross profits. The consensus of nine analysts rates ABBV a “Strong Buy.”
2. Federal Agricultural Mortgage
Federal Agricultural Mortgage Corp. (NYSE: AGM), chartered by the U.S. government in 1988, operates a secondary market for agricultural loans. The company currently offers a 3.47% dividend yield. It also has a market capitalization of $1.07B and a P/E ratio of 12.05.
3. Fifth Third Bancorp
Fifth Third Bancorp (NASDAQ: FITB) is one of the largest consumer banks in the Midwestern United States. The company currently offers a 2.82% dividend yield. It also has a market capitalization of $26.64B and a P/E ratio of 20.48.
Pfizer (NYSE: PFE) is one of the largest pharmaceutical companies in the world. The company currently offers a healthy 4.33% dividend yield. Pfizer has a market capitalization of $200.93B and a P/E ratio of 21.06.
5. Rio Tinto
Rio Tinto (NYSE: RIO) is a London-based mining company that produces iron ore, aluminum, copper and diamonds. The company currently has an attractive 7.84% dividend yield. Rio Tinto has a market capitalization of $129.14B and a P/E ratio of 13.28.
How Are Dividends Taxed?
According to the IRS, dividends are classified as either ordinary or qualified. Ordinary dividends are taxed just like ordinary income. Qualified dividends are subject to the capital gains tax rate but must meet specific requirements. You should receive a Form 1099-DIV for each company…