Investing in Dividend Stocks

Dividend stocks are stocks of companies that make regular distributions to their shareholders, usually in the form of cash payments. Dividend stocks can be useful sources of income, but the best dividend stocks can also be excellent ways to increase your wealth over the long term.

However, not all dividend stocks are great investments, and many investors aren't sure how to start their search. With that in mind, here's a list of dividend-paying stocks you might want to consider and some of the most important things to look for in top dividend stocks.

Five dividend stocks to buy

Five dividend stocks to buy

The Dividend Kings list is a great place to find top dividend stocks. Dividend Kings are companies that have paid and raised their base dividend for at least 50 consecutive years. The Dividend Achievers list -- 10-plus straight years of dividend increases -- is another great list to research.

Here are five top dividend stocks to consider buying now:

1. Lowe's

1. Lowe's

Home improvement giant Lowe's (LOW 0.03%) may not seem like a very exciting stock. And that's true unless you like dividend growth. The company has raised its dividend almost every year since going public in 1961 and has raised the payout by more than 500% over the past decade alone. For investors worried about the housing downturn that began in the second half of 2022, don't fret. When the housing supply is tight, and it's harder to buy, people tend to spend more to upgrade their existing homes. Another important number that's good for Lowe's: The typical U.S. home is between 31 and 60 years old, depending on the state. The next generation of DIYers will spend a lot of money at Lowe's, as will home improvement contractors. It's made pros a priority, and sales are growing there.

2. Realty Income

2. Realty Income

If you're looking for a simple way to invest in high-quality real estate for income and growth, Realty Income (O 1.17%) might be the perfect stock. The company owns a wide array of largely e-commerce-resistant properties, earning strong cash flows from tenants on long-term leases. Realty Income is also a Dividend Achiever, with 28 consecutive years of dividend increases -- every year since going public in 1994 -- and 54 straight years of paying a dividend every month.

3. Chevron

3. Chevron

Oil is back. Over the past few years, oil stocks have roared back to the forefront. The energy sector has been one of the best-performing since the COVID-19 pandemic, and Chevron (CVX -1.16%) has been a big winner for investors.

But if we are being fair, Chevron has actually been a pretty solid stock to own -- especially for dividend investors -- for years, generating strong cash flows and growing the payout modestly every year for over 35 years. The stock price can fluctuate a lot with the ups and downs of oil prices, but owning Chevron has proven a profitable investment for dividend-seekers over the long term.

4. Target

4. Target

For years, Target (TGT 0.92%) has been more profitable than its peers by posting some of the highest gross margins and operating margins in retailing. At the same time, its focus on increasing its e-commerce business and expanding in-store offerings has kept sales growing at a solid clip.

However, 2022 was a brutal year for Target investors, with very high expectations clashing with the challenging realities of retailing and sending shares of the stalwart down sharply. Despite a tough 2022 and some challenges in 2023, Target remains one of the best-run retailers out there and a solidly profitable company.

With dividend growth at 50 years and counting, and shares trading for a steep discount to their all-time highs, dividend investors should put Target on their shopping list.

5. Starbucks

5. Starbucks

Over the past four decades, Starbucks (SBUX 0.21%) has established itself as the dominant brand in coffee beverages. With almost 37,000 global stores, ready-to-drink beverages, and Starbucks-branded packaged coffee in hundreds of thousands more locations, nobody sells -- or buys -- more coffee than the company.

That power as a buyer, and its strong brand, has resulted in strong competitive advantages, including cost advantages throughout its operations and pricing power with consumers. Those economic moats, combined with a strong digital flywheel driving orders and operations, have resulted in a cash-cow business.

Starbucks has increased the dividend every year since 2010 while increasing earnings per share by 721% over the same period. Its yield of 2% at recent prices is on the higher end of its historical range, representing an attractive price to buy shares of the company.

Four more top dividend stocks to buy

Four more top dividend stocks to buy

The Dividend Achievers aren't the only place to look. Many excellent companies simply haven't been paying dividends (or haven't been publicly traded) long enough to be included in the list, although they can still make excellent long-term dividend investments.

Here are four more dividend-paying stocks with excellent brands, loyal customer bases, and favorable demographic trends that are also worth putting on your radar:

1. Brookfield Infrastructure

1. Brookfield Infrastructure

Sometimes the best stocks are the ones hidden in plain sight. That's the case with Brookfield Infrastructure (BIPC -2.38%) (BIP -1.57%), which owns water, energy, utility, transportation, and communications infrastructure projects all over the world. Its assets generate steady, recession- and inflation-resistant cash flows, and Brookfield returns a sizable portion to shareholders. It claims a dividend yield near 3% at recent prices for Class C shares, more than 4% for the limited partner units, and a goal to raise the payout 5% to 9% every year. Brookfield Infrastructure is a hidden dividend gem that's delivered over 980% in total returns since it went public in 2008 -- almost triple the S&P 500 over the same period.

2. Microsoft

2. Microsoft

Microsoft (MSFT 0.67%) is one of the most important software companies on earth and has rebuilt its business over the past decade to focus on recurring subscription-based revenues that keep its customers connected and the cash flowing. The company has a solid balance sheet with more cash than debt and a very low payout ratio that leaves tons of room to increase the dividend. Its 13-year streak of dividend increases is easy to miss, with a yield of less than 1% at recent prices. But what it hasn't paid in yield, Microsoft has absolutely delivered in total returns.

3. American Express

3. American Express

Financial services such as consumer and business lending are another place to find a handful of top dividend stocks, and American Express (AXP -0.69%) is one of the best. Although not on the list of every-year dividend raisers, American Express has a decades-long track record of either raising or maintaining its dividend through every economic environment. The big lesson here is that when other banks and lenders are cutting their dividends, Amex has proven able to stand pat during the downturns.

That's a credit to its high-quality lending standards and its focus on higher-income credit customers who are less likely to default on their debts during weak economic periods. That makes American Express very appealing to investors who like owning a top financial services company but who are also concerned about economic conditions. This is a great stock to buy during broad market downturns and a solid hold for a bull market recovery.

4. Clearway Energy

4. Clearway Energy

Renewable energy is mostly considered a place for growth investors, but it's also a wonderful opportunity for dividends. Clearway Energy (CWEN.A 1.95%) (CWEN 1.78%) is a perfect example. The company invests in, acquires, and operates renewables facilities, selling the power on long-term contracts -- think decades, not years -- to utility companies and very large power consumers.

After seeing the stock rocket higher during the COVID-19 pandemic, it's given back some gains during 2023 on concerns that rising interest rates could affect its business, which does indeed require a lot of debt to finance wind and solar farms.

While those concerns aren't completely unfounded, the market is certainly "pricing" them in now, with the dividend yield well above 5% as of July 2023. With stable, contracted cash flows and strong tailwinds of future demand, Clearway is a compelling risk-reward choice for dividend investors.

Highest dividend stocks

Highest dividend stocks

Whether to generate income you'll use today, or as capital you can reinvest to increase your wealth, there's a good chance you're looking for a big dividend payout. If you're hoping to maximize the amount of dividends you earn, here are some suggestions:

First, consider dividend yield above dividend size. The dividend yield is the percentage of the share price you bought the stock for, paid in dividends annually. That's far more relevant than the dollar amount of dividends per share.

Next, don't make owning high-dividend-yielding stocks your No. 1 priority. Focus first on business quality and a company's ability to maintain -- and increase -- the payout. Only then can you know if a high dividend yield is sustainable.

What to look for in dividend stocks

What to look for in dividend stocks

If you're new to dividend investing, it's smart to familiarize yourself with dividend stocks and why they can make excellent investments. Once you have a firm grasp on how dividends work, a few key concepts can help you find excellent dividend stocks for your portfolio.

• Payout ratio: A stock's payout ratio is the amount of money the company pays per share in dividends divided by its earnings per share. In other words, this tells you the percentage of earnings that a stock pays to shareholders. A reasonably low payout ratio (say, 70% or less) is a good sign that the dividend is sustainable.
• History of increases: It's a very good sign when a company raises its dividend year after year, especially when it can continue to do so during recessions and other tough economic times such as the COVID-19 pandemic.
• Steady revenue and earnings growth: When looking for the best dividend stocks to own for the long term, prioritize stability. Erratic revenue (up one year, down the next) and fluctuating earnings can be signs of trouble.
• Durable competitive advantages: This is perhaps the most important feature. A durable competitive advantage can come in several forms, including a proprietary technology, high barriers to entry, high customer switching costs, or a powerful brand name.
• Supportable yield: This is last on the list for a reason. A high yield is obviously preferable to a lower one, but only if the other four criteria are met first. A high dividend is only as strong as the business that supports it, so compare dividend yields after you make sure the business is healthy, and the payout is stable.

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Dividend stocks are long-term investments

Dividend stocks are long-term investments

Even the most rock-solid dividend stocks can experience significant volatility over short periods. There are simply too many market forces that can move them up or down over days or weeks, many having nothing to do with the underlying business itself.

So while the companies listed above should make great long-term dividend investments, don't worry too much about day-to-day price movements. Instead, focus on finding companies with excellent businesses, stable income streams, and (preferably) strong dividend track records. The long term will take care of itself.

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