When held as part of a diverse investment portfolio, dividend stocks are great assets. A dividend is a portion of the company's earnings that are returned to shareholders as a percentage of the holding's value. The size of the dividend is set by the company's board of directors, but the average is around 2%. Although 2% doesn't seem very high, it's certainly a higher return than you'll be seeing from your savings account anytime soon.
Advantages of Dividend Stocks
Typically, dividend-paying stocks are more expensive than stock in a smaller company, but they're worth adding to your portfolio anyway. Just check out these pros:
- Stable companies: Companies don't even consider paying dividends until they have a steady cash flow that outpaces their growth or expenses. Stock in these companies may never triple overnight, but they won't crash either.
- Regular payments: Divident payments come on a set schedule (set by each company), which is incredibly valuable if you're retired, but really, who wouldn't benefit from consistent passive income?
- Compounded returns: By reinvesting your dividends into the company, you steadily grow your stock holdings without having to invest more of your available cash. Think of it like a much-more-profitable savings account.
2015's Best Dividend Stocks
Typically, the companies that you see offering dividends are companies that are so large and successful, they've become household names. Don't be wooed by your familiarity with (or even love of) a certain company when you're deciding which companies you want to buy into. Instead, look for three things: stable cash flow, high dividend yield, and low stock volatility. The higher the dividend yield, the larger your dividend will be, but the highest payout in the market won't help you if your stock value crashes because the company was a bad investment.
The best thing you can do before buying a stock is to do your research, but these three companies are great places to start.
- Coca-Cola: This company is a true household name. Coca-Cola has a concentrated growth strategy (which shows they're serious about increasing cash flow), a 3.3% dividend yield (which is above average), and a beta of 0.51 (indicating low volatility).
- Consolidated Edison: Known as Con Ed to it's customers, Consolidated Edison has a 192-year-old corporate history. Con Ed provides utilities to millions of customers in New York, has a 4.4% dividend yield (and a 40-year history of increasing dividend payments annually), and an incredibly low beta of 0.1 (which translates to "very, very stable").
- General Mills: General Mills has been paying their dividends without issue for more than a century, which tells you that this is one company that knows how to manage their cash flow! Their dividend yield is 3.1%, which is 50% higher than the 2% average. Like the other two companies on this list, General Mills is stable: their beta rating is 0.19.