Dividend stocks are a key component of many investment portfolios, for investors seeking short-term payments and potential long-term gains. When you buy shares in a company, you become a partial business owner, and as such, you’re entitled to a portion of the company’s profits, paid out as dividends. These dividends, if paid recurrently year- over-year, create a passive income stream, which can support your lifestyle or be reinvested to increase your ownership size in the business.
What Are Dividends?
Dividends represent cash payments disbursed by companies to their shareholders, with the received amount contingent upon the quantity of shares held. This serves as a means for companies to share their profits with shareholders.
How Dividends Work
Company management decides the dividend amount and frequency. Dividends are usually paid quarterly, half-yearly, or annually. They reflect the company’s financial health and future prospects. As an investor, you may choose to receive dividends in cash or reinvest them in additional shares.
An average dividend yield for stocks refers to the mean percentage that a stock pays out in dividends each year relative to their share price. It’s a way to measure the income generated from an investment in stocks, independent of any market price changes. Here’s a breakdown of what it means:
- Payout Ratio: The Payout Ratio refers to the proportion of earnings a company distributes to its shareholders in the form of dividends divided by the total earnings. When a corporation earns a profit, it has the option to reinvest all or part of it back into the business as retained earnings, buy back its own shares, or distribute it to its shareholders as a dividend. The payout ratio specifically measures what percentage of these profits are paid out to shareholders as dividends.
- Yield: The dividend yield is calculated by taking the annual dividend per share and dividing it by the stock’s price per share. For example, if a stock pays annual dividends of $1 per share and its current price is $50 per share, the dividend yield is 2%.
Pros and Cons of Dividend Stocks
Pros:
- Steady Income: They provide a regular income stream, especially attractive for retirees or those seeking to take some cash off the table.
- Indicator of Company Stability: Regular dividends often indicate a stable and mature company that can grow with less retained earnings.
- Tax Advantages: In some jurisdictions, dividends may be taxed at a lower rate than other forms of income, providing potential tax advantages for investors.
Cons:
- Lower Growth Potential: Companies paying high dividends might reinvest less in business growth.
- Tax Implications: Dividends are subject to taxation, which varies by country.
- Market Sensitivity: A reduction in dividends can negatively impact a company’s stock price.
- Nothing is guaranteed: In difficult circumstances, the company might opt to retain the dividend, potentially leading to a decline in their stock value.
Top Dividend Stocks: An Overview
Now, let’s take a look at the five-year performance of some well-known dividend-paying stocks.
- Overview: AbbVie is a pharmaceutical company known for its dividend consistency and attractive yield. With a strong portfolio of medications, including the popular drug Humira used for the treatment of moderate to severe rheumatoid arthritis (RA) in adults, AbbVie has maintained a reputation as a reliable dividend-paying stock in the healthcare sector.
- Five-Year Performance: 61.52%
- Quarterly Dividend Amount: 1.55 USD
- Annual Dividend Yield: 4.48%
- Consecutive Years of Payments: More than 10 years
- Overview: Despite facing industry challenges and disruptions, Ford has managed to maintain its dividend and has shown potential for growth. As an iconic American automaker, Ford has a rich history and continues to adapt to changing market dynamics, making it an interesting option for investors.
- Five-Year Performance: 13.25%
- Quarterly Dividend Amount: 0.15 USD
- Annual Dividend Yield: 5.80%
- Consecutive Years of Payments: More than 10 years
- Overview: Chevron is a major player in the energy sector, providing both dividends and growth opportunities. With operations spanning the globe, Chevron is involved in oil and gas exploration, production, and refining, making it a key player in the energy industry.
- Five-Year Performance: 27.10%
- Quarterly Dividend Amount: 1.51 USD
- Annual Dividend Yield: 4.18%
- Consecutive Years of Payments: More than 10 years
- Overview: Coca-Cola is a staple in the consumer goods sector, offering stability and dividends. As a global leader in the beverage industry, Coca-Cola’s recognisable brands and long history of dividend payments make it an attractive option for income-focused investors.
- Five-Year Performance: 17.10%
- Quarterly Dividend Amount: 0.46 USD
- Annual Dividend Yield: 3.21%
- Consecutive Years of Payments: More than 10 years
- Overview: PepsiCo, a global beverage and snack giant, is renowned for its diverse product portfolio, which includes popular brands like Pepsi, Lay’s, and Gatorade. The company not only offers growth potential but is also recognised for its commitment to delivering consistent dividends to investors.
- Five-Year Performance: 44.29%
- Quarterly Dividend Amount: 1.27 USD
- Annual Dividend Yield: 3.04%
- Consecutive Years of Payments: More than 10 years
Past performance is not an indication of future results.
These companies have shown a consistent dividend yield and far outperformed the S&P 500 average annual dividend yield of 1.52% (the 5-year average dividend yield of the S&P 500 stocks (2018–2023) is approximately 1.67%). To understand when these and other dividend payers are paying dividends, you will need access to a dividend calendar like this one.
Investment Strategies with Dividends
Consider your investment goals when incorporating dividend stocks into your portfolio. Whether you seek regular income, balance riskier investments or leverage compounding, dividends offer versatility. Diversifying with an ETF of dividend stocks can further reduce risks associated with individual stocks.
Dividend Taxation
Dividend taxation depends on your location and personal circumstances and may be subject to change in the future. In the UK, for example, dividends are taxed at varying rates, with an allowance that makes the first £2,000 tax-free. Investment schemes like ISAs can offer tax benefits on dividends.
Final thoughts: Are dividend stocks right for you?
Dividend stocks can be a valuable addition to an investment portfolio, offering a blend of income and potential growth. Investors should carefully consider their financial goals and risk tolerance when selecting dividend-paying stocks. They might not yield high capital growth, but managed well, they can be a significant part of a well-considered investment strategy.
eToro is a multi-asset investment platform. The value of your investments may go up or down. Your capital is at risk.