How to Choose Best Dividend Paying Stocks. Which Ones are the Most Profitable Options?
For several decades, traders have been looking for the best dividend paying stocks out there. The main criteria to look for when betting on a great dividend stock is a history of powerful fundamentals, great entry points, escalating dividend distribution over time, and a long-standing bullish trading action in the shares.
Investing in dividends is not a fast method of investing, but slow and steady wins the race. For instance, Warren Buffet is popular for making investments in the best dividend paying stocks, which helped him build an empire over decades making him amongst the richest people worldwide. And it was his trick to reinvest dividends that probably helped.
So far, this might sound like an easy-peasy strategy – find a firm that pays dividends and then reinvest those dividends for several years to build your net worth. But it is a lot more complicated. You need to ensure you are betting on a quality name or you may see dividend elimination, dividend cuts, and stock price depreciation. You should be looking for these factors mentioned below before choosing the best dividend paying stocks.
Strong Cash, Weak Earning Expectations
The primary thing to look for while choosing the best dividend paying stocks is consistent profits. If a company is not consistently profitable, eliminate its name from your list.
It is possible to see decent dividend returns from firms that are giving out profits but not favourable growth on a yearly basis, but since the companies showing healthy dividend pay exist, it would be foolish to choose the former. Pull together your parameters and only acknowledge companies delivering lucrative growth.
Seek long-term earning growth expectations ranging from 5% to 15%. The reason you should not go above 15% is that the rising likelihood of earning disappointments almost always cut the stock value.
While earnings steering profitable growth are an important indicator of a company paying quality dividends, cash flow is what actually pays for those dividends. You must ensure that the company has a powerful cash flow generation.
Lastly, while choosing the best dividend paying stocks, investors seek entities that have raised their dividends for at least five years. This greatly escalates the chances of continued dividend growth and that is a huge positive for investors. Also, ensure that you purchase the shares prior to the ex-dividend rate.
Do Not Do Debt
Steer clear of those dividend-paying companies that have excessive debt. In order to know about the debt situation of a company, look at the firm’s debt-to-equity ratio (DTR.) If the DTR is high, look somewhere else.
Every investor has a different opinion about how much DTR is too high, but consider eliminating those companies whose DTR is above 2.00. Ideally, a DTR below 1.00 will allow you to sleep better at night.
This is because if a company has debt, it might pay at some point in the near future to reduce the debt. When this occurs, additional cash may go towards deleveraging instead of its dividends.
Check Industry Health
While choosing the best dividend paying stocks, this factor is usually overlooked. For example, when most of the integrated gas and oil companies are suffering because of a plunge in oil prices, the stocks need to be sold off. And because of weakening global demand as well as oversupply, dividend increases and stock price appreciation are not likely in most cases.
Contrarily, with people ageing, the need for healthcare services will escalate immensely in the next 2-3 decades. However, this does not mean that healthcare stock cannot be affected by broader market plunges, they are simply more likely to be resilient as compared to other stocks. Also, there is an increased chance for dividend raise as long as an industry is in boom mode.
You must not pick a company based on its history because things are constantly changing. For example, consider the soft drink industry. With the rise of consumers who are health-conscious, betting on a soft drink company is not likely to be as profitable as it was in the past.
The bigger players are moving towards an alternative/healthier drink space, but it is going to take some time to establish themselves. So, avoid taking an uneven road when an easier one is available.
Best Dividend Paying Stocks in 2020
Amongst the best dividend paying stocks in 2019 fetching solid yields to powerful performance are ADP (ADP), Sysco (SYY), Illinois Tool Works (ITW), Lockheed Martin (LMT), and Best Buy (BBY.) The best dividend paying stocks to buy and hold in 2019 are judged on various metric matters.
Stability of dividend reflects a steady and long track record of payouts. Growth of dividend points to a firm in sound financial health, struggling to make its stock more appealing to existing as well as new income investors.
The dividend payout ratio can help you determine if the dividend is sustainable. However, not all high-dividend stocks are wise investments because a ratio of more than 100% may signal a potential cut. Utilise the following information as a base to your own research.
ADP (ADP)
This provider of payroll and HR solutions has a history of giving dividends since 1989.
Dividend yield: It is 2.1%, as ADP stock bears an annual dividend of $3.64.
Dividend growth rate: 11%.
Five-year return: 100%.
Dividend payout ratio: 66.8%.
Dividend stability factor: 4, where 0 is the most stable and 99 is the most volatile.
Earnings stability factor: ADP increased earnings at a 17% yearly in the last five years. The earning stability factor stands at 3.
Sysco (SSY)
It is one of the best dividend paying stocks because it has been paying and increasing dividends for forty-eight consecutive years. Sysco is a food-equipment and food distributor.
Dividend yield: It is 2.3%, as Sysco stock pays an annual dividend of $1.80.
Dividend growth rate: 5%.
Five-year return: 100%.
Dividend payout ratio: 50.7%.
Dividend stability factor: 17.
Earnings stability factor: Sysco increased earnings at a 17% yearly in the last five years. The earnings stability factor stands at 4.
Illinois Tool Works (ITW)
This manufacturer of industrial equipment and fasteners has been paying dividends since 1990 without fail.
Dividend yield: It is 2.5%, as Illinois Tool Works (ITW) stock pays a dividend of $4.28 annually.
Dividend growth rate: 19%.
Five-year return: 83%.
Dividend payout ratio: 56.2%.
Dividend stability factor: 3.
Earnings stability factor: Illinois Tool Works gained earnings at a 14% yearly in the last five years. The earning stability factor stands at 3.
Lockheed Martin (LMT)
This defense and aerospace giant has been paying dividends each year since 1995. It has been growing dividends for sixteen years in a row.
Dividend yield: It is 2.5%, as Illinois Tool Works (ITW) stock pays a dividend of $4.28 annually.
Dividend growth rate: 14% over the past 5 years.
Five-year return: It delivered a compound stock market return at 105% over the past 5 years (excluding reinvested dividends).
Dividend payout ratio: 44.4%.
Dividend stability factor: 8 over the past 5 years.
Earnings stability factor: Lockheed Martin gained earnings at a 15% yearly in the last five years. The earning stability factor stands at 9.
Best Buy
The technology retailer has been paying dividends every year since 2004. It has been increasing dividends for seven years in a row.
Dividend yield: It is 2.7%, as Best Buy (BBY) stock pays a dividend of $2.00 annually.
Dividend growth rate: 17%.
Five-year return: 91%.
Dividend payout ratio: 37.6%.
Dividend stability factor: 17.
Earnings stability factor: Best Buy increased earnings at a 21% yearly in the last five years. The earning stability factor stands at 4.
Warren Buffet’s 5 Best Picks for Long-Term
If you want to make it big and earn a lot of money through trading, you can do so Warren Buffet style. Warren Buffet supports value investing, which seeks to find undervalued stocks according to their intrinsic value. Financial metrics, such as price/earnings (P/E), price/book (P/B), return on equity (ROE) as well as dividend yield are the heaviest weights on the ‘Buffet’ scales.
Additionally, Buffet looks for companies that have economic moats or high fences to entry for competitors who may desire to invade the market and deplete profit margins. His top picks are:
Nike Inc.
Nike is a brand associated with high-performance shoes. However, the brand has now expanded beyond just shoes and is a leader in sporting goods, apparel, and anything athletic. Nike is undoubtedly #1 because it has nearly four billion dollars in cash with barely any debt. Nike is one of the most recognisable as well as the strongest brands in the world.
Burlington Northern Santa Fe Corp.
It is undoubtedly amongst Buffet’s favourites since he put 34 billion dollars on it. This freight railroad operator possesses or leases almost fifty thousand miles of route in Canada and the USA.
Burlington Northern transports almost everything necessary for the economy from autos and consumer goods to lumber, coal, and petroleum. It also sports a 2% dividend yield and a below market average P/E.
ConocoPhillips
This is an integrated energy firm, which participates in every part of the gas and oil industry, doing everything from refining and drilling to end sales of gasoline, petrochemicals, natural gas, and other refined products.
Although the company shares suffered immensely due to the global recession, with a rebound in crude oil prices as well as prudent decisions by the management, its stock trades for twelve times the earning while paying almost 4% dividend yield.
Costco
Costco is an operator of discount warehouses that subscribes to the ‘slow and steady wins the race’ philosophy. Operating under a strict rule of capping profit margins in order to offer the customers with lower prices, Costco has built a loyal customer base.
Costco sells grocery items, consumer goods, produce, electronics, seasonal goods, clothes, jewellery, home improvement items, and much more.
Procter & Gamble
There is at least one product by P&G in every house in the USA. Some of the brands by P&G are Gillette, Pampers, Bounty, Head & Shoulder, Tide, Oral-B, Dawn, Crest, Olay, Duracell, and Dawny. P&G has a dividend yield at 3% and a low P/E.
Conclusion
Finding the best dividend paying stocks seems to be easy as it demands that the company has strong cash flow, earnings growth between 5-15%, and a low debt-equity ratio. Additionally, the company must be paying dividends regularly along with increasing the amounts every year.
So, Best Buy, Sysco, Lockheed Martin, Illinois Tool Works, and ADP are amongst the best dividend paying companies in 2019. If your motive is to reinvest dividends like Warren Buffet, you can also choose from his 5 best picks for long-term investment, which are Costco, Procter & Gamble, ConconPhillips, Burlington Northern Santa Fe Corp, and Nike.
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