Dividend stocks: an overview

Dividend stocks are shares of companies that pay a portion of their profits to a class of shareholders on a regular basis. These companies are usually well-established, enjoy stable profits, and have a track record of distributing some of those profits to shareholders.

Distributions are known as earnings It can be paid in cash or as additional stock. Most dividends are paid on a quarterly basis, but some are paid monthly, annually, or even once in the form of a special dividend.

While dividend stocks are known to regularly pay their dividends, in tough economic times, dividends may be cut to conserve cash.

One useful metric for investors to gauge the sustainability of a company’s dividend payments is Dividend ratio (DPR). Ratio is a measure of total dividends divided by net income. It tells investors how much of a company’s net income is paid to shareholders in the form of a dividend versus how much the company keeps to invest in further growth.

If the ratio exceeds 100% or is negative (meaning net income is negative), the company may borrow to pay dividends. In these two cases, the dividend is at a relatively greater risk of being cut.

Dividend shares, as measured by The S&P 500 Dividend Aristocrats Index has outperformed the broader stock market. The index has delivered a total return of 0.3% over the past year, above the Russell 1000’s total return of -8.2%.

Below, we take a look at the top five dividend-paying stocks in the Russell 1000 by Forward Dividend Yield, except for companies that have payout ratios that are either negative or greater than 100%. Several of them outperformed the broader market last year.

Market performance numbers and all statistics below as of August 24, 2022.

• Forward Dividend Yield: 10.26%
• Payout percentage: 84.07%
• Price: $37.05
• Market value: $4.6 billion
• Total return for a year: -29.4%

OneMain Holdings Inc. is a consumer finance company that provides the creation and underwriting of personal loans and personal loan service, primarily to non-core clients. It operates through the following sectors: Consumer, Insurance and Other sectors. OneMain’s most recent quarterly dividend of $0.95 per share on August 12 was paid to shareholders as of August 8, 2022.

• Forward Dividend Yield: 10.13%
• Payout percentage: 49.83%
• Price: $9.87
• Market value: $4.6 billion
• Total return for a year: 3.8%

Rithm Capital, formerly New Residential Investment Corp. It is a public company Real Estate Investment Trust (REIT) Investing in the residential housing sector. The Company’s portfolio includes mortgage servicing assets, home 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 percentage: 52.33%
• Price: $10.91
• Market value: $11.3 billion
• Total return for one year: -2.7%

Lumen Technologies is a technology and communications company that provides services to consumers and businesses around the world. It provides an integrated platform that combines network assets, cloud connectivity, security solutions, voice and collaboration tools to help businesses use their data and adopt next-generation technologies. On August 22, a Federal Communications Commission (FCC) He agreed to sell Lumen’s existing Domestic Exchange Company (ILEC) to internet service provider Brightspeed in 20 states. The sale value is approximately $7.5 billion.

• Forward Dividend Yield: 8.56%
• Payout percentage: 45.20%
• Price: $72.45
• Market value: $47.4 billion
• Total return for a year: 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 percentage: 75.59%
• Price: $23.47
• Market value: $7.3 billion
• Total return for a year: -1.0%

Starwood Property Trust is a REIT focused on commercial mortgages. The company engages in real estate lending, investment and services across both commercial and residential properties.

3 Ratios used to analyze dividend stocks

Profitable Return: This ratio measures the annual value of dividends received relative to the market value per share of a security. Investors reckon profit return Divide the annual earnings per share by the current stock price.

For example, if Company XZY issues a dividend of $10 per year at the current share price of $100, the dividend yield is 10% ($10/$100 = 10%). Those seeking high-yield stocks can start their search by examining issues with dividend yields above a certain percentage. Keep in mind that there are many other factors besides dividend yield that investors should consider before investing in stocks.

Dividend ratio: DPR measures the amount of a company’s dividend paid to shareholders. Investors calculate the ratio by dividing total dividends by net income.

For example, if Company XZY reports net income of $50,000 and pays $15,000 in annual dividends, it will have a DRP of 30% ($15,000/$50,000 = 30%). This means that the company pays 30% of its profits to shareholders. Generally, a company that pays less than 50% of its net profit is considered stable dividend and has the potential for sustainable earnings growth in the long run.

Earnings Coverage Ratio: This ratio measures the number of times a company can pay a dividend to its shareholders. Investors calculate the dividend coverage ratio by dividing the company annually earnings per share (EPS) by its annual earnings per share.

For example, if Company XZY reports a net income of $10 million with an annual dividend of $2 million to shareholders, the dividend coverage ratio is 5x. ($10 million / $2 million). Usually, investors view a higher dividend coverage ratio as more favorable.

Advantages of Dividend Stock

Two of the main advantages of investing in dividend stocks include creating passive income and reinvest profits.

passive income: Companies that pay a dividend typically issue it quarterly, creating a reliable stream of passive income that investors can spend as they please. Dividends also have the added advantage of compensating for a lower share price.

Reinvestment of Profits: Investors can reinvest the profits they receive back into the company to get more shares. This is called Dividend Reinvestment Plan (DRIP). Participation in the DRIP allows the investor to benefit from it compound returnsA proven strategy for building long-term wealth.

Do Dividend Research

A high yield is great but it is just one of many aspects to consider when investing in dividend stocks. A higher-than-average return can indicate a problem if a struggling company is paying out large amounts of dividends in an effort to attract investors.

In addition to the dividend yield, be sure to take a good look at the following data as well.

• Payout Ratio: As mentioned earlier, this is the percentage of dividends that a company pays to its shareholders. A payout ratio of 35% to 55% is good because a company that distributes up to half of its profits as dividends is likely to be a good performer and an industry leader. Most importantly, it reinvests a large portion of its profits into itself in order to grow.
• Increased Dividends: The strong history of dividend increases is welcome news as it indicates that the company has the financial resources and desire during good and bad economic times to continue paying its shareholders, and increase the amount it pays.
• Reliable revenue and profit growth: over time, the more stability, the better. Sometimes the erratic results may not be surprising but anything else could indicate that the company is in trouble.
• Strong market share and competitive advantages: These companies can help maintain their ability to perform excellently. These advantages may be intellectual property, advanced technology, high barriers to entry, and a well-known and highly respected brand name.

bottom line

The dividend yield compares the income a company pays to shareholders at the price of that stock. It is calculated by dividing the amount of annual earnings (the amount of income paid over the year) by the stock price. While a high dividend yield may be attractive, it doesn’t necessarily mean the stock is a smart investment.

Dividend yield is one of the tools you should use to check which dividend stocks are likely to be worth owning. Excessively high dividend yields may indicate that the company is struggling. Likewise, companies with very high payout ratios can also indicate risk to investors.

Before investing your money, invest some time in researching companies that are financially healthy enough to maintain and increase their profits, and continue to offer an attractive dividend yield.

The comments, opinions and analyzes contained herein are for informational purposes only and should not be considered as individual investment advice or recommendations to invest in any security or to adopt any investment strategy. While we believe the information provided here is reliable, we do not guarantee its accuracy or completeness. The opinions and strategies expressed in our content may not be suitable for all investors. Because market and economic conditions are subject to rapid change, all comments, opinions, and analysis contained in our content are provided as of the date of publication and may change without notice. The material is not intended as a complete analysis of every material fact relating to any country, region, market, industry, investment or strategy.