Dividend stocks can offer wide opportunity for investors, so why not go straight to top-rated dividend stock ideas? In this piece, we’ve put together a list of quality stocks that pay dividends from a range of market sectors that have high dividend yields and payout ratios. These companies also have strong business fundamentals, which include consistent earnings and good prospects for growth.
By the time you're done reading, you’ll discover some of the best top-rated dividend-paying stocks to consider adding to your portfolio, as well as a step-by-step guide on how to invest in them.
What Are Dividend Paying Stocks?
Dividend paying stocks entitle holders to periodic payments, typically quarterly or annually. The payment is usually a percentage of the company's earnings and is known as a dividend.
Dividend stocks are a popular choice for investors because they offer a regular stream of income that can be reinvested to generate even more income. They can also provide a measure of stability during periods of market volatility.
As a defensive investment, dividend stocks can be an effective hedge against the undesirable effects of inflation, as well as help keep portfolios in the green during economic downturns.
It's important to note that dividend stocks still carry risk. A company can reduce or eliminate its dividend payments if the company's earnings decline and the stock price can also fall if the company's financial condition deteriorates.
Still, for many investors, the potential rewards of owning dividend stocks outweigh the risks. Careful selection can also ensure that dividend stocks become a valuable addition to any portfolio.
What Makes a Dividend Stock Top Rated?
There are numerous factors that go into choosing top rated dividend stocks — most hinge on the company’s business fundamentals. Here are some of the most important financial ratios and other elements that make for a great dividend stock.
The dividend yield is a company's dividend divided by its share price. For example, if a company pays a $1 dividend and its shares trade at $100, its dividend yield would be 1%. To make this calculation easier and faster, you can check out our free dividend yield calculator.
Dividend yields can be a helpful metric for investors when trying to determine which stocks to buy, with the best dividend stocks also being high-yield dividend stocks.
As a useful benchmark, the S&P 500 dividend yield is often used, which at the time of writing stands at 1.82%. This can be compared with the stock of your choice to see how it fares against the aggregate performance of the world’s most capitalized stocks.
The dividend payout ratio measures the proportion of earnings paid out as dividends to shareholders, typically expressed as a percentage.
The dividend payout ratio is an important metric because it measures how much of a company's earnings are being paid out to shareholders and how much gets reinvested back into the business. A company with a payout ratio of 55% or higher is desirable for a top-rated dividend stock.
There are a few different ways to calculate the dividend payout ratio, but the most common is to divide the dividends paid out by the company over a certain period of time (usually one year) by the company's earnings over that same period of time.
Another factor that helps to make a top-rated dividend stock is the company’s earnings growth.
A company's earnings growth is important because it is a key driver of share price appreciation. When a company's earnings grow, so does its stock price. That's because investors will pay more for a portion of a company that grows its earnings. If a company's earnings are stagnant or declining, then its stock price is likely to follow suit.
A high earnings growth means the company’s dividend will likely continue to be paid in the future, making it an essential attribute of a top-rated dividend stock.
Dividend Coverage Ratio
The dividend coverage ratio is a financial ratio that measures a company's ability to pay its dividends. The dividend coverage ratio is calculated by dividing a company's earnings before interest, taxes, depreciation and amortization (EBITDA) by its dividend payments.
A company with a high dividend coverage ratio is typically considered financially healthy and able to sustain its dividend payments. A company with a low dividend coverage ratio may be at risk of reducing or eliminating its dividend payments.
5 Top-Rated Dividend Stocks
Here are some of the top-rated monthly dividend stocks at the time of writing. These companies were selected for the strength of their dividends as well as their positive underlying fundamentals.
It should be noted that stocks in this list pay dividends on a quarterly and yearly cycle. If you’d like to see top rated monthly dividend stocks, check out our monthly dividend payers resource.
3M has a diversified business portfolio which helps to insulate it from economic downturns. This resiliency has allowed it to beat its EPS estimates consistently over the last ten years. The company also has an enormous 64-year dividend increase track record, dwarfing the average of nine consecutive years for NYSE stocks.
- Dividend yield: 5.25%
- Annual dividend: $5.96
- Dividend payout ratio: 83.24%
- Dividend coverage ratio: 1.73
Portland General Electric (PGE) is an electric utility that provides service to the city of Portland, Oregon and surrounding areas. Although the stock currently has a consensus "hold" rating, analysts also predict its shares have a 20.37% upside for the next 12 months. Up until the last couple of years, the company has also consistently beaten its EPS estimates.
- Dividend yield: 4.27%
- Annual dividend: $1.81
- Dividend payout ratio: 67.54%
- Dividend coverage ratio: 1.56
Alexandria Real Estate Equities Inc. is a leading real estate investment trust in the United States that owns, operates and develops properties for the life science industry. The company scores high on all of the key dividend factors and also has an 8.56% projected earnings growth, from $8.41 to $9.13 per share at the time of writing.
- Dividend yield: 3.59%
- Annual dividend: $4.72
- Dividend payout ratio: 255.14%
- Dividend coverage ratio: 3.38
Altria Group, a multinational cigarette and tobacco manufacturing company headquartered in Richmond, Virginia, is the largest tobacco company in the world. The company’s mammoth dividend payout ratio of 387.63% is both its biggest draw card and point of concern. Although impressive, it’s almost certainly unsustainable — it pays out almost four times as much to investors as it receives in earnings.
- Dividend yield: 8.31%
- Annual dividend: $3.76
- Dividend payout ratio: 387.63%
- Dividend coverage ratio: 1.32
AT&T is another company that has stable and consistent earnings, as has reliably exceeded its EPS forecasts over the last few years. The company’s dividend yield is also higher than the average of other NYSE-listed companies.
- Dividend yield: 7.40%
- Annual dividend: $1.11
- Dividend payout ratio: 40.81%
- Dividend coverage ratio: 2.28
How to Invest in Top-Rated Dividend Stocks
Now, how to invest in dividend stocks? Let's walk through a few steps.
Step 1: Choose your investment goals.
There are a number of factors to consider when choosing investment goals for stock investing. First, you need to consider your investment objectives and time horizon. Are you looking to grow your wealth over the long term or generate income in the short term? You also need to consider your investment knowledge and experience. Do you have a good understanding of the stock market and are you comfortable making investment decisions or would you prefer to leave it to the professionals?
Once you have a good understanding of your investment objectives and experience, you can start to narrow down your investment goals.
Step 2: Decide your risk tolerance.
In order to decide on risk tolerance for stock investing, there are a few key factors to consider. First, assess your current financial situation and your goals for investing. Determine how much money you can afford to lose without putting your financial stability at risk.
Second, consider your time horizon for investing. If you have a long time horizon, you can afford to take on more risk because you have time to recover from any losses. However, if you have a shorter time horizon, it's a good idea to be more cautious with your investments.
Also, think about your personal risk tolerance. Some people are more comfortable with taking risks than others. Consider your past experience with investing and your willingness to take on risk when making your decision.
Step 3: Set an investment budget.
Set an investment budget by considering your overall goals. For example, if you are saving for retirement, you may be willing to accept more risk in exchange for the potential of higher returns. On the other hand, if you are trying to generate income from your investments, you may want to focus on stocks in less volatile sectors.
Once you have an idea of your goals, you can start to research different stocks and set a budget for how much you are willing to invest in each one. Remember that stock prices can fluctuate, so you should only invest what you are comfortable losing. Many investors choose to spread their money across different stocks to minimize risk. This can be done by investing in a variety of companies in different industries or by investing in mutual funds or exchange-traded funds (ETFs) that hold a basket of stocks.
Step 4: Select your stocks.
Choose companies that have a strong payout ratio, dividend yield, dividend coverage ratio, earnings growth and an ample dividend amount.
Another factor to take into consideration is the company’s history of paying and increasing its dividends, as this shows a company's commitment to returning value to shareholders.
You can also look for companies that have an enduring competitive advantage in the form of brand, intellectual property, prestige or cost-saving efficiencies that competitors don’t have.
Step 5: Monitor your portfolio.
There are a number of ways to track the performance of a stock portfolio. Many brokerages and financial websites offer tools to help investors track their portfolios. There are also a number of third-party apps and websites that offer portfolio tracking capabilities.
When monitoring a stock portfolio, it is important to look at more than just the stock price. Investors should also track the dividend yield, earnings per share and other fundamental data points. This will give a more complete picture of the performance of the portfolio.
Regularly monitoring a stock portfolio is a critical part of successful investing. By keeping track of the performance of the stocks in the portfolio, investors can make informed decisions about when to buy, sell or hold.
Consider Top-Rated Dividend Stocks
The best dividend-paying stocks have similar characteristics that can easily be discovered using the tools MarketBeat provides. We also make it easy to monitor your performance once you’ve created your portfolio.
High-paying dividend stocks may be a way for you to smooth out the inflation headwind turbulence and brief recessions, but it’s also advisable to seek the independent advice of a financial planner to consider stocks that pay dividends for your overall situation.