Are you looking to invest in something that offers regular income?
How about something that puts compound interest to use?
Dividend stocks have been adding stability and income to portfolios for a long time. Because the companies paying dividends usually tend to be well-established, some even paying them at a growing rate for decades, as you’ll see ahead.
If you’re exploring the idea of adding some dividend stocks to your protfolio, read on to learn a few interesting things about them.
Ownership disclaimer: I have no financial interest in any of the stocks mentioned in this article, with the exception of Boeing. Under no circumstances does this information represent a recommendation to buy or sell securities.
Let’s start with a few interesting dividend facts:
- You must buy the shares before the ex-dividend date to receive the dividend payout
- You can choose to reinvest the dividend instead of receiving it as cash
- Dividends can serve as protection from inflation
- Dividends can (and do) get cut
- Cyclical stocks can easily wipe out dividend gains
- Only ten companies have raised their payouts for 50 or more straight years
The income you receive from dividends is in addition to any gains your portfolio may see as stocks appreciate in value. This allows you to create a stream of income alongside the growth of your portfolio, but it also allows you to utilize the concept of compound interest and reinvest your dividends. This works especially well if you’re young and can afford to let your capital ‘ride’ over decades.
What are dividends?
Dividends are payments a company makes to share profits with a class of its stockholders. They are determined by the company’s board of directors and are paid on a regular basis. You can view them as rewards/returns you get in exchange for taking a risk and investing your money into a company.
Types of dividends
- Cash dividend: Pretty straightforward, as well as the most common type. A company pays the dividend in cash and the money is deposited into your brokerage account.
- Stock dividend: Instead of cash, companies may pay shareholders additional shares of stock.
- Dividend reinvestment programs (DRIPs): A plan you opt into that takes the cash dividends your receive and reinvests it by purchasing more stock of the issuing company, typically free of commissions or brokerage fees.
- Special dividends: Separate from the typical recurring dividend. It is a non-recurring distribution of profits to common stock shareholders It’s typically larger than a normal dividend and is tied to some event that generated a lot of profits, or an accumulation of profits over the years that the company decides is best dealt with by paying out the shareholders.
- Preferred dividends: Those issued to preferred stockholders. Preferred stocks are a hybrid instrument that takes precedence over common stock but is inferior to bonds in terms of claims on the company assets. They may have priority over common stock in payments of dividends.
Note: No matter the form in which they are paid, dividends are always considered taxable income by the Internal Revenue System (IRS). Read on to see what the current dividend tax rates are.
How dividends work?
Once a dividend is declared, the qualified company shareholders are notified via a press release. This information is then circulated throughout the finance/investing world and can be easily viewed.
There are four key dates for an investor to look for:
- Declaration date: Self-explanatory, the date the company declares the dividend.
- Ex-dividend date: Precedes the record date. If you buy a stock before this date, you are entitled to the most recent dividend. If you buy a stock on this date or after, you are not.
- Record date: The date of record. Basically means all shareholders of record on that date are entitled to the most recent dividend payment. Meaning they bought the stock in time.
- Payment date: Shareholders get paid. Usually, about one month post the record date.
The power of re-investing dividends
Should you reinvest dividends? By reinvesting your dividends, particularly ones paid by companies with a tradition of increasing their dividend over time, you can better the chances of increasing your total wealth over time.
Some things are better illustrated than said. So, let’s proceed to do just that by going 25 years back in time and buying an initial amount of 200 shares of a stock at $250 per share, a $50,000 investment.
- Let’s say that this stock pays an annual dividend of $12.50, a 5% yield.
- Let’s also assume a 2% annual dividend growth rate and a 4% annual stock price growth rate.
After 25 years, what would the shares be worth with and without reinvesting dividends?
|Investment Outcome:||Without Reinvesting||With Reinvesting|
|Number of Shares:||100||261.58|
So, all else being equal, after holding the shares for 25 years, your initial $50,000 would grow to $107,484.54 without reinvesting. But the same initial amount with dividends reinvested regularly would have grown to $174,335.54.
What are some interesting dividend facts?
1. An entire branch of stock valuation theory is devoted to dividends
(Source: Wikipedia 1)
It’s called the Dividend Discount Model and it’s a method that is used to value stock by taking the net present value of all future dividends. This is done by adding up all future dividend payments to investors and discounting them back to today’s dollars at an appropriate and carefully chosen growth rate.
And it is typically calculated using the Gordon Growth Model [P = D1 / (r-g)], a formula that assumes annual dividends grow at a constant rate forever. But additional variations of this model take into account the fact that dividend growth is rarely that linear and the fact that most companies go through phases of growth. Phases during which the amount in dividends paid to investors can vary greatly.
2. High yield doesn’t always mean a good thing
(Source: Seeking Alpha)
To understand why it helps to first understand what the dividend yield tells you and what it does not. A dividend yield tells you what your return is per share. So if a stock is trading at $30 and has an annual dividend of $1.50, to get the dividend yield you divide $1.50 by $30 which gives you 5%.
Now imagine the hypothetical company trading at $30 is taking a nosedive and is trading at $18 per share instead. What is its dividend yield now? Well, assuming the dividend didn’t change and is at $1.50, we divide it by $18 which gives us 8.33%. A whopping 3.33% increase in the dividend yield!
Thus, you should look underneath the hood, so to speak, of a stock to see why it’s dividend yield is trending so high. Maybe the company is facing some serious trouble ahead, and you’d miss it if all you cared about was the dividend yield in your evaluation. Avoid the trap, do your research.
3. Dividend investing is not equivalent to value investing
A true value investor will take everything about a stock into account before investing, dividends included. So it’s not to say one doesn’t care about the other, it’s just that they are technically not the same thing and shouldn’t be viewed as such. Value investing is concerned with capital gains, while dividend investing is primarily concerned with dividend income.
In fact, a value investor may consider a non-dividend paying stock a great undervalued investment, whilst a dividend investor may not. A dividend investor would put more emphasis on a company’s ability to produce sustainable cash flows over the long run, hoping for dividend increases along the way.
4. Dividend stocks are not always safe stocks
(Source: Investopedia 1)
Because dividend stocks have a great reputation for generally being safe and reliable investments, some confuse a stock dividend with safety. Sometimes a dividend is used as a tool by stagnant companies to pacify growing frustrations among their investors.
Another great example occurred during the 2008 Financial Crisis when the dividend yields of many stocks went up, because the stock prices went down. If you were only concerned about dividend yields at the time and bought up a bunch of these stocks, it wouldn’t have looked pretty. As the crisis deepened and company profits nosedived, some of them got rid of their dividend programs. A move that typically further plunges the stock.
5. Prior to the Great Depression dividends were considered the primary source of return for stocks
It certainly seems as though people these days are more concerned about finding the next Amazon or the next moon destined Meme-stock, and less about dividend yields. Who wants to sit around and slowly sip on 2-3% dividend yields versus riding a rocket of thousand % profits into space.
But it wasn’t always like this. Prior to the Great Depression of 1929, and for a while thereafter, dividends were king. They were considered the main source of return for stocks, and capital gains were a risky bonus, if they happened to materialize at all.
6. Distributions are different than dividends
(Source: Dividend Earner)
Not all “dividend-paying” investments actually pay dividends. Some pay what’s known as distributions. Typically this is the case with trusts like Real Estate Investment Trusts (REITs), partnerships, and estates. To the unassuming investor, the payment may not look much different, the cash arrives into their account on a scheduled basis. But distributions are different than dividend payments.
Dividends may or may involve cash. But distributions always come in the form of cash and can lower a company’s tax burden quite substantially by making the distribution with pre-tax income. The IRS considers them a payout of the company’s equity. In short, pay attention to the taxes.
7. You must buy the shares before the ex-dividend date to receive the dividend payout
There are four dates associated with a dividend payout: the declaration date, the ex-dividend date, the record date, and the payable date. But if you want the dividend payout, you have to buy the stock in time. To time this right, an investor needs to buy before the stock’s ex-dividend date. Simply put, if you purchase the stock on the ex-dividend date or after, you won’t get the next dividend payment. Alternatively, don’t sell the stock too soon and forfeit the upcoming dividend.
8. You can choose to reinvest the dividend instead of receiving it as cash
(Source: Lumen – Boundless Accounting)
If you plan to hold a stock for a long time, a dividend reinvestment plan is a great way to build capital. In effect, you are buying up more shares (or fractions thereof) in lieu of a cash payment. I personally reinvest all my dividends in this manner, as most of my dividend-paying stocks are very long-term buys. Many brokers offer this service nowadays, and all you have to do is opt-in. But don’t forget taxes, if the stocks are in a taxable account, even though you reinvested all the proceeds, in the government’s eyes you still need to pay taxes on those dividends issued to you.
9. Companies can’t fake dividends
(Source: Stansberry Research)
They say you can’t fake a cash payment in accounting. And that’s what a dividend happens to be. It’s money leaving the company’s bank account and being ‘mailed’ to its shareholders. That can’t be faked, the investors either get the dividends or they don’t. A quick glance at your bank account is the depth of the necessary investigation as to whether you got the dividend or not.
Now, where the money is coming from is a different story. What if a company borrows money or uses funds outside of operating cash flow to pay the dividends? Can you accurately judge a company’s financial health without having this knowledge of where dividends are being sourced? Certainly not, so it’s worth keeping this in mind should you ever get suspicious.
10. Dividends can serve as protection from inflation
There are companies that increase their dividends over time. Which in the long run can offer excellent protection against inflation. The best way to demonstrate this is through an example.
So, lets say:
- in 2022 you bought 1,000 shares of a company called XYZ for $20 per share
- and let’s say that XYZ pays a dividend of 50 cents a share
- your current annual dividend is 1,000 x .50 cents a share = $500 per year
- now, let’s say consumer prices increase by 2% in the next year (←inflation)
- meaning something that cost $500 in 2022, now costs $510 in 2023
- but lucky for you XYZ just boosted their dividend by 5% (to 52.5 cents per share)
- meaning your 1,000 shares of XYZ now net you $520.5 per year
- congratulations, you just beat inflation!
Thus, when you hear someone say dividends provide a strong inflation hedge, just think of it as them saying that certain companies pay a dividend that is higher than the rate of inflation. When evaluating this approach as a hedge against inflation, however, you should explore various sectors and consider high-quality dividend stocks for longer time horizons to stand a better chance.
11. Dividends can (and do) get cut
(Source: Investopedia 2)
Change, it’s the only constant in life. One of the most recent examples of a famous dividend cut is when Boeing announced its dividend suspension in March of 2020. Just two months earlier the CEO had stated the company will keep paying its 2.68% dividend yield, “unless something dramatic changes.”
And it turns out the dramatic change did occur, as the global COVID crisis worsened and the airline industry was sent in desperate pursuit of government aid. Another relatively recent example is when many reliable dividend-paying banks had to stop paying dividends during the 2008 financial crisis.
In fact, the Troubled Asset Relief Program (TARP), which virtually all U.S. banks were a part of in the crisis, actually required them to cut their dividends. Desperate times call for desperate measures.
12. “Stocks” aren’t the only dividend payers
Sure, dividend-paying common stocks may be the most popular kid in class, but they’re by no means the only dividend payers around. Other financial instruments such as Exchange Traded Funds (ETFs), Master Limited Partnerships (MLPs), and Real Estate Investment Trusts (REITs) offer investment incomes as well. Some of them may offer income to investors in the form of distributions, and as we mentioned earlier in this article, tax treatment for distributions can be different than that of common stock dividends.
13. Dividend tax rates have varied historically
(Source: Money Edge Pro)
|Time Period||Tax Rate on Dividends|
|1936-1939||Individuals income tax rate (Max 79%)|
|1954-1985||Individuals income tax rate (Max 90%)|
|1985-2003||Individuals income tax rate (Max 28%-50%)|
|2012 – Present||0%, 15%, or 20% (depending on your tax bracket)|
14. Dividend increases are viewed as leading indicator by many
(Source: TD Ameritrade – The Ticker Tape)
It’s sort of an unspoken rule in finance, dividends are supposed to go up, or at least remain steady. As soon as a company announces they’re lowering or suspending a dividend it’s almost instantaneously viewed as weak/uncertain and investors start selling or shorting the stock.
This is why many corporate boards of non-dividend paying companies are hesitant about introducing a dividend when they’re not sure they can maintain paying it for the foreseeable future.
Now, on the flip side when a company announces a dividend increase, the market is thrilled! Both investors and analysts may see it as the management signaling that things are looking promising, and the operating conditions should be favorable going forward.
15. Dividend Aristocrats are companies that have increased their dividends for 25 straight years
(Source: Wikipedia 2)
In every arena of life, there are giants. Basketball has Jordan, football has Brady, soccer has Messi, and dividends have . . . Aristocrats. This super exclusive club consists of publicly-traded companies on the S&P 500 index that have increased their dividend payouts (excluding special dividends) for a minimum of 25 straight years. These companies have weathered all storms sent their way.
16. Only ten companies have raised their payouts for 50 or more straight years
There are giants, and then there are giants among giants. These ten dividend aristocrats are business wonders in my eyes. The kings of dividends. They’re not flashy, some are outright boring to most, but they’re the only ones that can boast 50 or more years of raising dividends.
S&P 500 Companies That Increased Dividends for Over 50 Straight Years
|Company||Years of Raising Dividends|
|Genuine Parts Company||64 years|
|Emerson Electric Co.||63 years|
|Procter & Gamble||63 years|
|Johnson & Johnson||58 years|
|Stanley Black & Decker, Inc||52 years|
|Hormel Foods||51 years|
17. A company called York Water has paid out an annual dividend for more than 200 years
If there was ever going to be a company to accomplish such a feat, it only makes sense that it’s in the water and sewer business. An inelastic necessity. This little-known water and sewer utility company that you’ve probably never heard of has consistently paid a dividend since 1816.
18. Utilities are a famous go-to sector for dividend-paying companies
(Source: Dividends Diversify)
As demonstrated by the York Water company which has been paying a dividend for over 200 years, the utility sector can offer serious stability to dividend investors. While you may not see impressive growth in this sector, it tends to be rich with great defensive stocks. No matter which direction the economy goes in the revenue of these companies is not impacted as much. People will still need gas, electricity, and water.
19. Debt takes priority over dividends
(Source: The Motley Fool)
Who has priority, a shareholder or a creditor? As the COVID-19 crisis took hold and wreaked havoc on cash flows in 2020, many companies proceeded to suspend their buybacks and dividends. Some of them were carrying a lot of debt and had to prioritize loan principal and interest payments. For example, Disney saved $3.2 billion in cash by suspending its dividend for 2020. The cash they will likely use in many ways, one of which is making payments on its $42.8 billion debt load.
20. Cyclical stocks can easily wipe out dividend gains
(Source: The Motley Fool)
Certain sectors tend to be more cyclical than others. For example, big oil and precious metals are cyclical sectors. Depending on where you enter (buy a dividend stock) the cycle, you may get stuck riding the wave down instead of up. Now, some of the dividend yields in these sectors can be quite appetizing, but if you buy at the peak of a cycle, any dividend gains you receive can be significantly wiped out by the company’s stock plummeting.
What are some high-quality dividend stocks?
There are plenty of dividend-paying stocks to choose from in the U.S. and around the globe. Some with impressively high yields to boast. But long-time dividend growth investors know there more to the game than surface-level appeal. Patience rewards them with superior total returns in the long run, even if if the yields don’t look too attractive on the surface.
Here is a list of the S&P’s best dividend aristocrats stocks to consider:
|Name||Market Value||Dividend Yield||Years of Annual Dividend Increase|
|West Pharmaceutical Services||$21.4 billion||0.2%||25 years|
|NextEra Energy||$164.2 billion||1.7%||25 years|
|IBM||$108.8 billion||5.3%||25 years|
|Albemarle||$18.3 billion||1.0%||26 years|
|Caterpillar||$107.2 billion||2.1%||26 years|
|Atmos Energy||$11.5 billion||2.8%||26 years|
|Essex Property Trust||$16.9 billion||3.2%||26 years|
|Expeditors International of Washington||$16.4 billion||1.1%||27 years|
|Chubb||$74.3 billion||1.9%||27 years|
|Realty Income||$23.1 billion||4.6%||27 years|
|People’s United Financial||$6.4 billion||4.9%||27 years|
|A.O. Smith||$9.9 billion||1.7%||28 years|
|Linde||$134.2 billion||1.7%||28 years|
|General Dynamics||$46.4 billion||2.8%||28 years|
|Roper Technologies||$42.3 billion||0.6%||29 years|
|Ecolab||$61.5 billion||0.9%||29 years|
|Chevron||$175.1 billion||5.6%||33 years|
|T. Rowe Price||$37.4 billion||2.2%||34 years|
|McCormick & Co.||$24.2 billion||1.5%||35 years|
|Cardinal Health||$15.5 billion||3.6%||35 years|
|Amcor||$17.6 billion||4.1%||36 years|
|AT&T||$203.9 billion||7.2%||36 years|
|Cintas||$36.7 billion||0.9%||37 years|
|Brown-Forman||$36.7 billion||1.0%||37 years|
|Exxon Mobil||$214.3 billion||6.7%||37 years|
|Air Products & Chemicals||$56.3 billion||2.4%||39 years|
|Aflac||$32.0 billion||2.9%||39 years|
|Franklin Resources||$13.5 billion||4.2%||39 years|
|Sherwin-Williams||$64.8 billion||0.7%||42 years|
|Medtronic||$158.7 billion||2.0%||43 years|
|Clorox||$23.6 billion||2.3%||43 years|
|McDonald’s||$160.9 billion||2.4%||44 years|
|Pentair||$9.1 billion||1.4%||45 years|
|Walgreens Boots Alliance||$43.2 billion||3.8%||45 years|
|Walmart||$412.6 billion||1.5%||46 years|
|Automatic Data Processing||$71.6 billion||2.2%||46 years|
|Archer Daniels Midland||$30.3 billion||2.8%||47 years|
|Consolidated Edison||$23.9 billion||4.4%||47 years|
|S&P Global||$80.0 billion||1.0%||48 years|
|PPG Industries||$32.4 billion||1.5%||48 years|
|VF Corp.||$31.7 billion||2.4%||48 years|
|PepsiCo||$192.9 billion||2.9%||48 years|
|Nucor||$16.5 billion||3.0%||48 years|
|Leggett & Platt||$5.7 billion||3.7%||48 years|
|Becton Dickinson||$73.9 billion||1.3%||49 years|
|Target||$97.3 billion||1.4%||49 years|
|Abbott Laboratories||$221.8 billion||1.5%||49 years|
|W.W. Grainger||$19.7 billion||1.6%||49 years|
|Kimberly-Clark||$44.9 billion||3.5%||49 years|
|AbbVie||$186.1 billion||4.9%||49 years|
|Sysco||$38.9 billion||2.3%||51 years|
|Stanley Black & Decker||$28.1 billion||1.6%||53 years|
|Federal Realty Investment Trust||$7.0 billion||4.6%||53 years|
|Hormel Foods||$26.7 billion||2.0%||55 years|
|Illinois Tool Works||$64.3 billion||2.2%||57 years|
|Lowe’s||$130.3 billion||1.3%||58 years|
|Colgate-Palmolive||$67.5 billion||2.2%||58 years|
|Johnson & Johnson||$437.7 billion||2.5%||58 years|
|Coca-Cola||$213.6 billion||3.3%||58 years|
|Cincinnati Financial||$14.0 billion||2.9%||61 years|
|3M||$104.8 billion||3.3%||63 years|
|Emerson Electric||$51.5 billion||2.3%||64 years|
|Procter & Gamble||$316.8 billion||2.5%||64 years|
|Genuine Parts||$15.0 billion||3.1%||64 years|
|Dover||$17.3 billion||1.6%||65 years|
Now, looking at the above chart and not seeing the likes of Apple, Amazon, Ford, and Tesla may have you asking:
How much does Apple pay in dividends: As of February 11, 2021, Apple pays a quarterly dividend of $0.205 per share (or 82 cents per share per year).
When does Ford pay dividends: The last of its quarterly dividend Ford paid was in Q1 on March 2, 2020, in the amount of $0.15 cents per share. The company suspended its dividend thereafter for the time being, due to the global COVID-19 pandemic.
Does Amazon pay dividends: Amazon does not pay a dividend. Many are hopeful that it will start paying one in the years to come, but nothing official has been said by the company to indicate as much.
Does Tesla pay dividends: Tesla does not pay a dividend. It has not indicated plans to start anytime soon, either.
Note on the numbers used in the article: In an effort to paint a fuller picture, the figures in this article were aggregated from numerous credible sources, who reported the results of their surveys at various points in time.
In closing, we hope these dividend investing facts and stats have helped you better understand how it all works. Dividend investing can be a great way to create a steady flow of income. As far as strategies for dividend investing go, good investors usually opt for either a high-dividend yield or high-dividend growth. A high-dividend yield strategy is chosen by those who want to see immediate income their way. And a high-dividend growth rate strategy is chosen by those who can afford to wait for 5, 10 years, or longer.
As low-risk as they typically tend to be, dividend stock can and do have pitfalls if you don’t know what to avoid. So, do you research.
Wikipedia 1 | Seeking Alpha | Dividend.com | Investopedia 1 | Dividend Earner | Investor.gov | Lumen – Boundless Accounting | Stansberry Research | Nasdaq.com | Investopedia 2 | Money Edge Pro | TD Ameritrade – The Ticker Tape | Wikipedia 2 | Madison.com | Dividends Diversify | The Motley Fool | Kiplinger