Where can I find the best dividend paying stocks?
How and where can I find the best dividend paying stocks? I currently have a brokerage account with Vanguard and a 401(k) with Fidelity. What are the advantages of these stocks over other investments?
You can find lists of dividend paying stocks and rankings in many places. Vanguard and Fidelity have suggestions on their website research, but you could also try many other sources like Barron's, Zacks, Wall Street Journal, Motley Fool, SPDR's, etc. The word "best" is very subjective, possibly misleading and depends on who you talk to. If you want consistent dividend payers, that have paid dividends consistently over the years and or increased them each year, that is another matter that to me, is more important. You can look that information up in the same places. There are companies like Blackrock's (I Shares), SPDRs or Wisdom Tree, to name a few, that have a large selection and are another source that offers a wide variety of choices of dividend payers in many different asset classes, such as large, mid sized, and small companies, domestic and international. Also, there are many choices offered in various sectors, like utilities, REITs or mortgage MLP's, domestic and foreign. Do your research on the sector and be careful. Look beyond the dividend and make sure the companies are financially solid (think pipelines and their volatility and how people misunderstood how they work over the last year). Other people addressed how dividends work as well as the tax advantages of dividends, so i will not go into the topic, but I would suggest, do your research so you understand the fundamentals before selection. Investopedia also has some good information, so you may wish to check them out out for some fundamental information.
In my experience in seeking the best dividend-paying stocks, I can conclude there is no one great place to find the best dividend-paying stocks. That comes through much research from several different resources, which is why some investors choose to leverage an advisor to help them with this task.
However, I can answer part 2 of your question about the advantages of dividend-paying stocks. I also wrote an article earlier in 2016 that was featured in the Wall Street Journal (see article here) that could also be a good resource for you. But, dividend-paying stocks can be advantageous to investors, especially those seeking income, because that is the essence of those dividend payers. Dividends are based on the number of shares you own, not based on the stock price. So while the stock price will fluctuate daily, the dividends paid can be much more consistent. Some companies go decades without a dividend decrease, keeping the income that spins off stable. For those that take dividends in cash or those that do not want to draw down the principal, this can be a positive benefit.
So, you must understand that there are two ways to make money with stocks - dividends and price appreciation. We all know how the price appreciation part works, but I think the dividend part is misunderstood. If you are not taking income for your portfolio, you can also reinvest these dividends to ultimately buy more shares. More shares equals more eventual income down the road (because dividends are based on the number of shares you own).
But, although dividend-paying stocks have performed well in recent years, there is not always a guarantee that they will do so. Also, picking the right stocks can be the most difficult part. It's important to not always go for the highest yield because companies can become overly stretched on their payout ratios and they come to a point where there current track cannot be maintained. This can be followed by massive cuts in the dividend per share, usually followed by massive declines in the stock price (see COP in the fall of 2015).
As I always say, the stakes are high in this "game" of investing. It's important to consult with a qualified investment professional before making any decisions. Dividend stocks are not right for everyone and they do carry risks. It's important to understand all of those risks before taking any action.
Joe Allaria, CFP®
If you are after dividends, and would like to be invested in stocks, Closed-end Funds are a consideration. Most CEFs provide a high level of current income, and there are many equity CEFs trading at discounts to their net asset value (the value of their holdings, i.e. stocks in the case of equity CEFs). You should consider having a properly constructed and professionally managed portfolio with a goal of high current income, if you are after dividends.
If you search online for "Dividend Aristocrats," you'll find a list of companies that have increased their dividend payouts over the past 25 years. This list will give you a good starting point for researching individual stocks. There are also ETFs that are comprised of such companies.
One advantage of dividend-paying stocks is that the quarterly dividend can be reinvested with no commission charge. Most brokerage accounts will allow you to set this up automatically.
Alternatively, you can decide to collect the dividend. Please note that dividend income is taxable (even if you reinvest it) unless it is in a retirement account. If you are in a very low tax bracket, dividend income may not be taxable (check with your tax advisor).
Dividend stocks have advantages in terms of generating income for you, thus most companies who offer the dividends are stable companies, such as Walmart, Exxon Mobile, Johnson and Johnson. Unlike growth companies, which are in their early cycle of the development and plow back the companies’ profit to expand, value firms are more mature companies and intend to share the profits with shareholders. You can find all of this information from investment/personal finance magazines, such as Kiplinger, Money, WSJ, etc.
On the second note, depending on your tax bracket, it may not be wise to have dividend stocks in a brokerage account because you will be paying capital gain taxes every year. Furthermore, instead of having a few company stocks that pay the dividends, you can use one dividend ETF to achieve both goals—generating income and being tax-efficient. That’s the beauty of using ETFs for your brokerage accounts. Here are a couple of my interviews with the InvestmentNews and Advisors magazines about using ETFs (http://www.investmentnews.com/article/20150419/REG/150419971/etfs-becoming-a-key-portfolio-staple, and http://www.etfa-mag.com/news/an-etf-only-shop-29475.html). Moreover, owning one low-cost broad-based dividend ETF can help you achieve diversification and minimize the investment risks. Best!