High Dividend Yield Stocks: How They Work (+ Top Picks for Your Portfolio)
These are not for the faint of heart.
When it comes to the stock market, we all know that slow and steady wins the race. You’ve probably seen enough Warren Buffet quotes on Instagram to know that the market is a marathon, not a sprint.
But maybe you’re the type of person that doesn’t want to just “set it and forget it”. Maybe you’re a little bit of a gambler and you can tolerate a higher risk– because you can for damn sure tolerate a higher reward.
Now, if danger is not your middle name, don’t worry. I’ve gotcha covered there too. Check out my guide to recession proof investing for a more conservative investing strategy.
But if you’re still here, I’m going to assume that you’re down for a more aggressive strategy.
What are high dividend yield stocks?
High dividend yield stocks are companies that make large profit distribution payments to investors each year. These are companies whose dividends are high relative to their stock purchase price, effectively increasing returns paid to investors—similar to interest payments on bonds, but with higher returns.
Dividend stocks—especially blue-chip names like Prudential, AT&T, and IBM—are great for investors who want both income and potential price appreciation as stock prices rise. We built a list of companies to consider if you want to invest in stocks specifically for their dividend payments.
16 high-dividend stocks to consider
- Prudential Financial - 7.24 %
- Kinder Morgan - 7.23%
- AT&T - 6.83%
- Bank of Nova Scotia - 6.56%
- BCE - 6%
- Chevron - 5.98%
- Bank of Montreal - 5.78%
- IBM - 5.42%
- Toronto - Dominion Bank - 5.15%
- Frank Templeton - 5.11%
- Welltower - 4.88%
- Omnicom* 4.85%
- AbbVie - 4.75%
- Duke Energy - 4.74%
- Royal Bank of Canada -4.62%
- MetLife - 4.5%
Author’s note: At the time of this writing, the author owns shares in Omnicom Group.
To build our list of dividend stocks, I identified 16 publicly-traded companies that pay among the highest dividend, relative to their stock prices. We also tried to stick with predominantly blue-chip companies, as those stocks with high market caps are better-positioned to survive economic fallout from the coronavirus pandemic.
All of the companies included have dividend yields of about 4.5% or higher (as of this writing). Most of these companies are financial or energy companies, while there are also consumer cyclical and tech companies included.
I also left some smaller companies off our list that pay higher dividend rates that we consider unrealistic. Dividend yields can sometimes be driven higher by declining stock prices because dividend yields are backward-looking. Yields are based on previous dividend payments relative to current share price but don’t take into account the likelihood of forthcoming dividend payments being as high as those paid previously.
In fact, sometimes an unrealistically high dividend yield can actually indicate that a company is in financial trouble.
So instead, I focused on large, well-established, stable companies that are more likely to survive the crisis and keep their dividend payments relatively constant and meet investor expectations.
1. Prudential Financial (PRU)
Prudential is a Fortune 500 company and the largest insurance company in the United States, with nearly $900 billion in assets—making it larger than both Berkshire Hathaway and MetLife. The company also provides financial services like annuities and investment management, with about $1.5 trillion in assets under management.
2. Kinder Morgan (KMI)
Kinder Morgan is one of the largest operators of oil and gas pipelines and terminals in North America. The company is based in Houston and operates 85,000 miles of pipelines.
3. AT&T (T)
AT&T is a global communications company that provides wireless phone services, as well as digital and satellite television, broadband, and security, as well as a range of business solutions.
4. Bank of Nova Scotia (BNS)
The Bank of Nova Scotia (dba “Scotiabank”) is one of the five largest banks in Canada. The bank is the third-largest bank in Canada by deposits and market cap. It operates throughout Canada, as well as in Europe, Asia, Latin America, and the Caribbean.
5. BCE (BCE)
BCE, formerly Bell Canada, is a large telecom and mass media company. The company trades on the Toronto exchange and is one of the largest companies in Canada.
6. Chevron (CVX)
Chevron is a global energy company and is one of the companies that Standard Oil was broken into after antitrust suits. The company is also one of the largest companies in the world by market cap.
7. Bank of Montreal (BMO)
Bank of Montreal was founded in 1817 and is a large Canadian retail and investment bank. The company is engaged in everything from mortgage underwriting to mergers and acquisitions.
8. IBM (IBM)
IBM is a large and storied technology company that needs no introduction. Today, it is focused on business technology solutions and driving new innovation.
9. Toronto-Dominion Bank (TD)
TD Bank is another large North American bank headquartered in Toronto. Though not affiliated with TD Ameritrade, TD Bank is a large institution in its own right, and offers investors a solid dividend yield.
10. Franklin Templeton Investments (BEN)
Franklin Templeton is one of the world’s largest asset managers, focused on mutual funds and ETFs for retail and institutional investors. The company has more than $700 billion in assets under management.
11. Welltower (WELL)
Formerly Health Care REIT, Welltower is a Toledo-based real estate investment trust that specializes in senior housing, assisted living, and memory care facilities. The company is probably the smallest company on our list and has just 392 employees.
12. Omnicom (OMC)
Omnicom is a large media and communications company headquartered in New York. The company is actually a combination of many storied brands in communication, including advertising firm BBDO.
13. AbbVie (ABBV)
AbbVie is a pharmaceutical company that originally started as part of Abbott Labs before being spun off. The company is now a $175-billion company in its own right and offers several drugs, including Humira.
14. Duke Energy (DUK)
Duke Energy is a large energy company headquartered in Charlotte. The $60-billion company was founded in 1900 by the family that started American Tobacco and for whom Duke University is named.
15. Royal Bank of Canada (RY)
RBC is the largest bank in Canada by market cap. The company serves more than 16 million customers worldwide and has a market cap of about $100 billion.
16. MetLife (MET)
MetLife is another of the largest insurance companies in the United States. The company provides insurance as well as other financial services to 90 million customers in 60 countries.
How dividend investing works
Dividend investing is relatively simple—all you do is research companies that pay high dividends relative to their share price. Essentially, what this allows you to do is purchase a portion of that company’s future earnings.
Of course, there are other criteria that you can use to further vet potential investments, including industry, market cap, and other financial information. All of this is based on your specific investment goals and risk tolerance.
Why dividend investing?
There are really only two reasons that anyone invests in anything: income or growth. They either want to purchase future cash flows (income) or see the value of their investment rise (growth).
Historically, people who want to invest for growth tend to target on stocks that are innovative or have other growth prospects. Many of these companies are small- to medium-size businesses that are still growing.
Income investors, on the other hand, typically invest in assets like bonds.
Dividend stocks, however, offer investors the best of both worlds. By investing in stocks that pay high dividends, investors get access to income—usually with higher yields than high-grade bonds—as growth. They get to participate if the stock price goes up.
Metrics for vetting dividend stocks
There are a number of metrics you can use to vet stocks before investing. If you’re investing specifically for dividends, here are some of the most important:
- EPS: Earnings per share represents a company’s net income on a per-share basis—essentially, how much profit could theoretically be distributed to investors if the company distributed all its profits.
- P/E: Price-to-earnings is a measure of a company’s share price relative to its net earnings; in other words, how much investors have to pay for each dollar of earnings.
- Dividend yield: This is the obvious one. It’s equal to a company’s past dividend payments divided by share price. Dividend yield goes up if a company increases its dividend payment or if its share price falls.
- Market cap: The market cap of a company is the total value of the equity portion of the business—it’s equal to the total number of shares outstanding times the share price. We considered this metric in building our list above in order to avoid smaller companies that may not be as well-established or as reliable in their dividend payments.
- Debt-to-equity: This metric measures how much debt a company has compared to shareholder equity (equity is how much would be left for shareholders if the company dissolved and distributed money left over after paying off debt). Higher debt-to-equity ratios are indicative of companies having more debt relative to their total worth, making them potentially riskier.
- Current ratio: The current ratio is a measure of a company’s current debt (short-term debts or those due to be repaid soon) relative to its current assets (cash and cash equivalents). This ratio measures a business’s liquidity. After all, a company that’s going to pay reliable dividends should have money on hand to cover its current debts.
The pros & cons of dividend investing
- Investors get both growth and income
- Dividend yields often better than bond yields
- Stocks don’t mature like bonds, so investors don’t have interest rate risk
- Many stocks can be traded commission-free
- Investors can lose money if stock prices decline
- Investors are exposed in the event of bankruptcy
- Measurements for dividend yield are inconsistent
- Historical dividends don’t guarantee future income
Alternative investing strategies to consider
Dividend investing offers a blend of growth and income investing, but that doesn’t mean it’s right for everyone. In fact, it’s often only used for a piece of an investor’s portfolio, along with other stocks, bonds, index funds, and real estate. Here are some other strategies that investors can use instead of or in addition to dividend stock investing:
Growth investing is when people invest in stocks or other assets, hoping that the prices of those assets will go up, and they can sell at a profit later.
Investing in bonds
Bond investing involves purchasing shares of debt issued by governments or companies. These debts are repaid over time, similar to a mortgage or other loan. Bond investors get access to income through regular interest payments, but they don’t get to participate if the company’s stock price appreciates. Bond investors do, however, get added protection in case the company has to file for bankruptcy.
In many ways, rental properties are very similar to dividend investing. Investors get income from rent payments, as well as potential price appreciation if the value of their property goes up over time. Plus, it opens investors up to all kinds of tax benefits, thanks to deductions that are geared specifically for real estate.
At the end of the day, there are many investing strategies to consider in addition to dividend stock investing.