Many stocks pay dividends, many more don’t. The mere presence of a dividend – the sharing of net profits with investors – defines it’s status and prospects as a prospective investment.
Proven performance
The best dividend stocks are those with a long history of profitability, and thus, stable or even a growing trend in dividend payments.
Such a history, with companies such as General Electric, for example, position the company as an income stock, rather than stock purchased as a speculation. Investors tend to be long-term, holding the stock for a current return from the dividend while banking on the strength of the company going forward to provide a stable and possibly increasing price value per share.
Trading range
As a rule, dividend-paying stocks, while certainly subject to the momentum of the overall market, tend to trade in a more narrow range. This is because the price per share is directly linked to the level of dividend, which yields a percentage return.
Rate of return
The best dividend stocks provide a return that competes with other forms of highly liquid investments, particularly bank instruments such as savings accounts and certificates of deposits. The rate is also compared to longer-term government securities and treasury notes.
If the going rate for bank CDs is, say, 3 percent, then the best dividend stocks would yield that, or better. If a share selling for $20 pays a $1 dividend per year, that’s a 5 percent return. And if the fundamental data for that company – profitability, growth prospects and other intangibles – seems as if it will remain strong, then this return would put such a company into the best dividend stocks category.
Finding the best dividend stocks
To find the best dividend stocks, have your broker (or do it yourself on your computer) find stocks that pay the rate of return you are looking for via their dividend (and not historical price appreciation). Other factors then kick in, especially the history of the dividend itself, the past and current performance of the market overall, and the specific niche in which the company competes.
Whether shopping for a dividend return or price appreciation, the underlying strength and performance of the company is always your first consideration.
Electric utilities and their dividends
One of the more common places to find solid dividend-paying stocks is in the electric utility arena, which is highly-regulated by the states and thus ensures a reliable level of profitability. Dividends are reliable because these firms know that this is the only way to attract a consistent level of new capital when needed, and to remain attractive they need to stay consistent with their dividends.
Which such a stable base of business and the presence of price regulation, profitability remains constant in nearly all market conditions. Which means, the dividend is also stable and thus, the rate of return is something investors can rely on.
All of this means the price won’t swing one way or the other to any degree. And that, in turn, leads investors to conclude that the only benefit of ownership is, in fact, the return on investment through the dividend.
One thing that does affect the price of high dividend shares is the going rate of interest rates in those competing vehicles. If banks raise their CD payout, then the price of shares may go down to yield a competitive rate of return on their dividend, which may or may not change at the same time.
They’re easy to find and easy to research. If your goal is to generate income and/or a reliable rate of return without a lot of market risk, then finding the best dividend stocks is a great investment of your time.
Just know that you won’t get rich through price appreciation, which is a different objective altogether. And in the stock market, rarely does one win on both counts.
