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Overview

Over the long haul, it's typically capital gains that provide a much bigger source of return to investors in common stocks, not dividends. As such, many investors tend to overlook and place less value on the impact of dividends. I know when I'm scouring the market for new stocks to invest in, I'm definitely more focused on the potential appreciation in the stock's price, with little-to-no attention placed on dividends.

First of all, what is a dividend? It's a portion of the company's retained earnings that they pay out to shareholders. It's usually a small percentage of the stock's going value, and it's paid out on a per share basis, usually quarterly. For example, looking at Wal Mart's current stock quote, it details a $2.24 annual dividend (so about $0.56) paid per quarter per share. The current stock price of Wal Mart is about $150 per share, so that works out to a an annual dividend yield of 1.49% ($2.24 per share divided by $150 per share). So anybody invested in Wal Mart's stock will receive this payout in addition to any appreciation (either on paper or if you cash out) in the stock's price, helping boost their total return.

Why Target Dividend Stocks?

So, the dividend component of investment returns of stocks has a number of benefits for investors. As you know, with common stocks the price may or may not increase after you invest. But at least with dividends, the cash flow is far more certain. Plus, dividends provide a nice cushion when the market stumbles.

Not all stocks pay a dividend though! Companies which pay out a dividend on their stocks are generally, first and foremost, profitable. It's not a requirement, but if they're not making any money, then they probably won't pay out any dividends to shareholders. Companies that can effectively redeploy retained earnings at higher rates of return will also not pay out dividends, reinvesting those into the business instead. Additionally, most dividend-paying companies are those which have been around for a while (lengthy operating history) and therefore are fairly well-established businesses. Picking up these kinds of stock may add stability to your investment portfolio.

Dividend stocks can be a great choice for investors looking for passive income. Because a lot of dividend stocks pay investors a set amount each quarter, investors can build an annuity-like cash stream. The top dividend stocks tend to increase their payouts over time, too, meaning more potential dividend income for those invested for the long-term. Another plus is the fact that investors can also choose to reinvest dividends if they don't need the stream of income. The dividends are still taxed, albeit at a lower capital gains rate of 15%, but by automatically having your dividends reinvested, you won't miss that aspect of the return! And that will contribute to the stock's compounding effect over the long-term as well.

How to Invest in Dividend Stocks

There are two main ways to invest in dividend stocks. You can either get into a mutual fund focused on dividend stocks, such as an index fund or an ETF. Or you can directly buy individual stocks that regularly payout dividends.

Dividend ETFs or Index Funds

If you're a beginner investor, you may want to opt for the ETF or index fund route. You'll automatically receive a selection of dividend stocks, meaning that with just one investment, you can own a complete portfolio of dividend stocks. This provides the benefit of instant diversification so if one of the companies in the fund decides to cut or suspend it's dividend, you can still rely on income from the others. These funds generally allow you to reinvest the dividends as well. But keep in mind that you would actually own shares in the fund; you wouldn't own equity in the companies themselves. For that reason, I tend to prefer investing directly in companies rather than using funds, but you have to decide what works for you.

Investing Directly in Dividend Stocks

In my view, the biggest drawback about investing directly in dividend stocks is the fact that it will take a lot more time and effort to develop a portfolio of such stocks. Some of the recommendations below should help in that regard if you so choose. Just remember to verify the info and do your own research in advance of any investing.

The biggest thing to keep in mind when buying a dividend stock is how secure the company's dividend may be. This means looking at the operating history and financials of the company to determine stability, comparing a company's dividend to that of its peers, and placing increased scrutiny on companies whose dividends appear super high. As we saw above, Wal-Mart's current dividend yield is 1.49%. As rule of thumb, I think anything below 5% is in the safe range, but anything above that could mean increased investment risk - risk that the company may be in financial trouble, or at least a cut of the dividend may be imminent. Or maybe investors are selling the stock, which is driving down the price and driving up the dividend yield. So place a weary eye on companies paying super high dividends!

My List of Best Dividend Stocks 2022

The following list reflects Raising InvestorIQ's list of best dividend stocks for 2022, using a selective criteria that should lead to solid dividend yields to enhance your portfolio.

Selection Criteria

1. Market Cap - Mid to Large caps - fairly well-established companies with a medium to large size.
2. Dividend Yield - results range from 2.23% to 5.3%. This is good range for dividend yield without assuming too much risk.
3. Strong Return on Equity (ROE): the results reflect TTM (trailing twelve months) ROE of 11.82% and above, ranging from mid to high 14.8% to 61%.
4. Strong Return on Assets (ROA): again, the results reflect TTM ROA. In this case 4% and above. Resulting companies are in the range of 4.1% to 31%
5. Low Total Debit to Equity: this is very important. Companies with lower levels of debt have much better ability to stick to their commitments of paying out dividends, even during downturns.

The resulting metrics above help to emphasize the strength of these dividend stocks, the best stocks to buy now. And while some of the companies are household names, such as Exxon, others are not so well-known but are apparently being managed fairly well. All of this helps to ensure the companies' commitment to upholding their dividend payouts. Additionally, aside from the dividends, many of them are performing well enough such that the holder of these stocks may also benefit from appreciation in the stock's price, as high oil and gas prices are driving the performance of these energy stocks, making great long-term investments to buy and hold as well.

Disclosure/Disclaimer

The information provided on this site is based on my own personal experience, research, and analysis, and it is not to be construed as professional advice. Please conduct your own research before making any investment decisions.  I am not a professional financial advisor, stockbroker, or planner, nor am I a CPA or a CFP. The contents of this site and the resources provided are for informational and entertainment purposes only and do not constitute financial, accounting, or legal advice. The author is not liable for any losses or damages related to actions or failure to act related to the content on this website.