Dividend stocks are companies that pay out a portion of their earnings to a class of shareholders on a regular basis. These companies usually are well established, with stable earnings and a long track record of distributing some of those earnings back to shareholders. The distributions are known as dividends and may be paid out in the form of cash or as additional stock. Most dividends are paid out on a quarterly basis, but some are paid out monthly, annually, or even once in the form of a special dividend. While dividend stocks are known for the regularity of their dividend payments, in difficult economic times those dividends may be cut to preserve cash.
One useful measure for investors to gauge the sustainability of a company’s dividend payments is the dividend payout ratio (DPR). The ratio is a measure of total dividends divided by net income, which tells investors how much of the company’s net income is being returned to shareholders in the form of dividends versus how much the company is retaining to invest in further growth. If the ratio exceeds 100% or is negative (meaning net income is negative), this indicates that the company may be borrowing to pay dividends. In these two cases, the dividends are at a relatively greater risk of being cut. We look at a practical example of calculating this ratio later in the article.
Below, we look at the top five dividend stocks in the Russell 1000 by forward dividend yield, excluding companies with payout ratios that are either negative or in excess of 100%. Dividend stocks, as measured by the S&P 500 Dividend Aristocrats Index, have outperformed the broader equity market. The index has provided a total return of 0.3% over the past year, above the Russell 1000’s total return of -8.2%. Several of the stocks below have outperformed the broader market in that period. These market performance numbers and all statistics below are as of Aug. 24, 2022.
- Forward Dividend Yield: 10.26%
- Payout Ratio: 84.07%
- Price: $37.05
- Market Cap: $4.6 billion
- 1-Year Total Return: -29.4%
OneMain Holdings Inc. is a consumer finance company that provides origination, underwriting, and servicing of personal loans, primarily to non-prime customers. It operates through the following segments: Consumer & Insurance and Other segments. OneMain’s most recent quarterly dividend of $0.95 per share was paid on Aug. 12 to shareholders as of Aug. 8, 2022.
- Forward Dividend Yield: 10.13%
- Payout Ratio: 49.83%
- Price: $9.87
- Market Cap: $4.6 billion
- 1-Year Total Return: 3.8%
Rithm Capital, formerly known as New Residential Investment Corp., is a public real estate investment trust (REIT) investing in the residential housing sector. The company’s portfolio includes mortgage-servicing-related assets, residential loans, non-agency securities, and similar investments. The company announced the change in its name and stock ticker in June 2022.
- Forward Dividend Yield: 9.17%
- Payout Ratio: 52.33%
- Price: $10.91
- Market Cap: $11.3 billion
- 1-Year Total Return: -2.7%
Lumen Technologies is a technology and communications company that provides services to consumers and businesses worldwide. It provides an integrated platform that brings together network assets, cloud connectivity, security solutions, and voice and collaboration tools to help businesses use their data and adopt next-generation technologies. On Aug. 22, the Federal Communications Commission (FCC) approved the sale of Lumen’s incumbent local exchange carrier (ILEC) business to internet service provider Brightspeed in 20 states. The value of the sale is roughly $7.5 billion.
- Forward Dividend Yield: 8.56%
- Payout Ratio: 45.20%
- Price: $72.45
- Market Cap: $47.4 billion
- 1-Year Total Return: 172.6%
Devon Energy is an oil and gas exploration, development, and production company. The company also transports oil, gas, and related products and processes natural gas.
- Forward Dividend Yield: 8.18%
- Payout Ratio: 75.59%
- Price: $23.47
- Market Cap: $7.3 billion
- 1-Year Total Return: -1.0%
Starwood Property Trust is a REIT focused on commercial mortgages. The company engages in real estate lending, investing, and servicing across both commercial and residential properties.
3 Ratios Used to Analyze Dividend Stocks
Dividend Yield: This ratio measures the annual value of dividends received relative to a security’s per share market value. Investors calculate the dividend yield by dividing the annual dividend per share by the current stock price. For example, if company XZY issues a dividend of $10 annually with a current share price of $100, it has a dividend yield of 10% ($10 / $100 = 10%). Those seeking high-yielding stocks can start their search by screening for issues with a divided yield above a certain percentage. Bear in mind that there are many other factors besides dividend yield that investors should consider before investing in a stock.
Dividend Payout Ratio: The DPR measures how much of a company’s earnings are paid out to shareholders. Investors calculate the ratio by dividing total dividends by net income. For instance, if company XZY reported a net income of $50,000 and paid $15,000 in annual dividends, it would have a DRP of 30% ($15,000 / $50,000 = 30%). This means the company pays out 30% of its earnings to shareholders. Generally, a company that pays out less than 50% of its net earnings in dividends is considered stable and has the potential for sustainable long-term earnings growth.
Dividend Coverage Ratio: This ratio measures the number of times a company can pay dividends to its shareholders. Investors calculate the dividend coverage ratio by dividing a company’s annual earnings per share (EPS) by its annual dividend per share. For example, if company XZY reported $10 million in net income with an annual dividend of $2 million to shareholders, it has a dividend coverage ratio of 5 times. ($10 million / $2 million). Typically, investors view a higher dividend coverage ratio as more favorable.
Advantages of Dividend Stocks
Two key advantages of investing in dividend stocks include generating a passive income and dividend reinvestment.
Passive Income: Companies that pay dividends typically issue them quarterly, creating a reliable stream of passive income that investors can spend how they please. Dividends also have the added advantage of offsetting share price depreciation.
Dividend Reinvestment: Investors can reinvest dividends they receive back into the company to acquire more shares. This is called a dividend reinvestment plan (DRIP). Participating in a DRIP allows the investor to take advantage of compounding returns—a proven strategy to build long-term wealth.
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