What Are Dividends? Buy the Best Dividend Stocks

Investing is all about building long-term growth and dividends can be a great opportunity to help you achieve this goal. What are dividends? Basically, for every share of stock you own, you’re paid a part of the earnings of the company. This means you make money by simply owning the stock. Before deploying a “stock dividend” strategy, it’s important to understand the following: 

Best Dividend Stocks to Buy and How-to Guide

• What Is a Dividend?
• What Are Dividend Stocks?
• Best Dividend Stocks?
• How to Invest in Dividend Stocks
• How Do Stock Dividends Work?
• Dividend Calendar
• Dividend Tax Rate
• What Is Dividend Yield?
• How to Calculate Dividend Yield
• What Are Qualified Dividends?
• Dividend Reinvestment Plans (DRIPS)
• Dividend Investing Strategy

Dividend investing may seem complex but understanding the basics of dividend investing is surprisingly simple. Once you understand a few key elements, you’ll be able to understand dividends and how they work.

What is a Dividend?

The first step in dividend investing is to understand how a dividend is defined. Essentially, a dividend is a reward to the shareholders of a company for choosing to invest in that company. Anyone who owns stock in a company is a shareholder. When a company has extra money, there are two basic options for how the company can choose to use that money. The company may either reinvest the money in the company (this is called retained earnings) or distribute the funds to the shareholders.

A company may choose to reinvest money in the company for any number of reasons. For example, a company may want to fund research and development for a new project. Reinvesting money in the company is often needed to help the company grow. As a shareholder in a company, you benefit from the growth of the company.

The other option when a company has made a profit is to distribute that profit to the shareholders. This distribution is known as a dividend. Dividend distribution may come in the form of cash dividends or stock dividends. Cash dividends may be received as a check or deposited directly into your bank account. Typically, a company will do both, reinvesting some profits and distributing some money to dividend investors. This way, the company is more likely to continue to grow (which leads to future shareholder profits) and you also share in the current profits of the company.

What Are Dividend Stocks?

Investing in dividend-paying stocks is a common investment strategy. Dividends are essentially free money, though taxes do apply. But how do you know which stocks will pay dividends? Companies that pay dividends tend to be larger and more established. It is far less likely for newer companies to pay dividends. This is because newer companies may struggle to make consistent profits and the companies (and their shareholders) receive a bigger advantage from reinvesting funds from profits than from paying dividends. 

Companies pay out dividends as a specific amount per share. Generally, the amount per share is only a few cents, but if you own a hundred or a thousand shares, the value obviously becomes greater. Companies typically have a fixed calendar for paying dividends but may choose to announce a dividend payment at any time. The idea is to reward you for choosing to be an investor in their company, while also increasing confidence in the company. Ideally, if the company has high enough profits to distribute some to shareholders, it must be doing well. 

A stock that pays dividends is not necessarily better or worse than one that does not. If a company has a clear plan for growth that requires reinvestment of funds, this strategy may ultimately prove more valuable to the shareholder in the long run. This is because shareholders may earn more from a large growth in the stock of the company than they would from a small dividend payment. If you only invest in dividend stocks, you’ll likely miss out on other investment opportunities, such as mutual funds and other equity securities. That’s why it’s important to have a diversified portfolio. That being said, dividends have many benefits, so there are plenty of good reasons to include them as part of a diversified investment portfolio. 

Best Dividend Stocks

Not all dividend stocks are created equal. Some are more expensive, some pay dividends more regularly, and some pay larger dividends than others. There is no “right” or “wrong” dividend stock. Instead, it’s about finding the dividend stocks that are best for you. If you’re planning to live off the cash flow provided by dividends, the preferred stock for you will be different than if you’re simply looking to diversify your portfolio with a few cheap dividend stocks. 

Many companies are known for their consistent payment of dividends to shareholders, but that doesn’t mean that the best dividend stocks are always the same. As with all investing, picking the best stocks is also about timing. The best dividend stocks of may not be the best dividend stocks of 2022 . If you’re looking for the best cheap dividend stocks of 2023, it’s important to study the most current data available. 

Also, the exact timing of purchasing dividend stocks is very important. After a company announces that they will be paying out a dividend, it may be tempting to buy the stock. But if you buy the stock after the ex-dividend date, you will not receive the dividend. The previous stock owner from whom you bought the stock will receive the dividend instead. 

Company	Dividend Yield	Annual Payout	Payout Ratio	3-Year Dividend Growth	P/E Ratio	Market Cap	Industry
CALM Cal-Maine Foods	18.29%	$8.80	54.15%	94.04%	3.10	$2.36B	Agricultural production - livestock & animal specialties
OMF OneMain	10.83%	$4.00	66.01%	56.05%	6.00	$4.46B	Personal credit institutions
ORCC Owl Rock Capital	9.97%	$1.32	72.13%	26.67%	8.33	$5.16B
LNC Lincoln National	8.59%	$1.80	25.21%	6.03%	-1.09	$3.55B	Life insurance
FIBK First Interstate BancSystem	8.23%	$1.88	65.96%	11.09%	8.31	$2.39B	State commercial banks
WU Western Union	7.69%	$0.94	58.39%	5.52%	6.11	$4.58B	Business services, not elsewhere classified
PPBI Pacific Premier Bancorp	6.87%	$1.32	54.55%	14.47%	6.56	$1.84B	State commercial banks
CFG Citizens Financial Group	6.42%	$1.68	37.25%	6.00%	6.31	$12.67B	State commercial banks
USB U.S. Bancorp	6.38%	$1.92	41.83%	5.97%	8.01	$46.16B	National commercial banks
BNS Bank of Nova Scotia	6.19%	$3.05	54.56%	5.07%	8.86	$59.02B	State commercial banks
VLY Valley National Bancorp	6.15%	$0.44	36.67%	7.72%	6.28	$3.64B	National commercial banks
APAM Artisan Partners Asset Management	6.10%	$2.00	72.73%	7.72%	11.92	$2.61B	Investment advice
PRU Prudential Financial	6.09%	$5.00	41.74%	6.27%	911.56	$29.94B	Life insurance
CM Canadian Imperial Bank of Commerce	5.99%	$2.49	44.62%	5.54%	10.55	$38.15B	Commercial banks, not elsewhere classified
SBGI Sinclair Broadcast Group	5.98%	$1.00	36.36%	7.72%	4.67	$1.16B	Television broadcasting stations
BKU BankUnited	5.81%	$1.08	35.41%	5.98%	5.38	$1.38B	Federal savings institutions
MFC Manulife Financial	5.69%	$1.10	45.08%	10.82%	8.87	$35.70B	Life insurance
ASB Associated Banc	5.53%	$0.84	35.00%	5.49%	5.98	$2.29B	State commercial banks
WHR Whirlpool	5.33%	$7.00	42.63%	13.80%	-3.59	$7.20B	Household appliances
LAMR Lamar Advertising	5.29%	$5.00	68.97%	6.97%	22.78	$9.63B	Real estate investment trusts
FITB Fifth Third Bancorp	5.26%	$1.32	38.04%	10.26%	7.25	$17.09B	State commercial banks
BBY Best Buy	5.22%	$3.68	59.45%	20.74%	11.21	$15.42B	Radio, television, & electronic stores
FNF Fidelity National Financial	5.18%	$1.80	44.89%	12.00%	14.18	$9.46B	Title insurance
UGI UGI	5.14%	$1.44	51.43%	5.60%	-9.57	$5.87B	Gas & other services combined
AAP Advance Auto Parts	5.11%	$6.00	56.39%	192.40%	14.20	$6.96B	Auto & home supply stores
AQN Algonquin Power & Utilities	5.08%	$0.43	74.14%	8.96%	-140.98	$5.83B	Electric services
PNC The PNC Financial Services Group	5.06%	$6.00	42.98%	11.04%	8.10	$47.29B	National commercial banks
CADE Cadence Bank	5.02%	$0.94	34.81%	7.93%	8.28	$2.03B	State commercial banks
GES Guess'	4.99%	$0.90	33.58%	16.96%	8.09	$1.00B	Womens', misses', childrens', & infants' undergarments
SFNC Simmons First National	4.94%	$0.80	48.48%	5.90%	8.75	$2.06B	National commercial banks
VICI VICI Properties	4.94%	$1.56	73.24%	8.63%	22.10	$31.73B	Real estate investment trusts
FBP First BanCorp.	4.93%	$0.56	37.58%	48.67%	7.23	$2.04B	State commercial banks
LXP LXP Industrial Trust	4.92%	$0.50	72.46%	5.55%	26.74	$2.97B	Real estate investment trusts
FRME First Merchants	4.91%	$1.28	30.70%	7.72%	6.57	$1.56B	National commercial banks
TRN Trinity Industries	4.86%	$1.04	68.87%	10.72%	27.44	$1.74B	Railroad equipment
BMO Bank of Montreal	4.84%	$4.23	43.34%	10.61%	7.13	$62.31B	Commercial banks, not elsewhere classified
AUB Atlantic Union Bankshares	4.84%	$1.20	43.32%	32.38%	8.64	$1.86B	State commercial banks
KTB Kontoor Brands	4.80%	$1.92	40.85%	18.42%	9.86	$2.24B	Mens' & boy's furnishings, work clothing, & allied garments
AMCR Amcor	4.79%	$0.49	67.12%	27.10%	15.50	$15.05B	Miscellaneous manufacturing industries
CRI Carter's	4.76%	$3.00	50.25%	14.47%	11.14	$2.38B	Apparel, finished products from fabrics & similar materials
RF Regions Financial	4.74%	$0.80	33.61%	7.84%	7.21	$15.82B	National commercial banks
MDC M.D.C.	4.71%	$2.00	59.00%	21.64%	6.30	$3.10B	Operative builders
INDB Independent Bank	4.67%	$2.20	40.97%	5.73%	7.94	$2.08B	State commercial banks
TD Toronto-Dominion Bank	4.66%	$2.84	44.03%	7.16%	9.62	$111.53B	Commercial banks, not elsewhere classified
GBCI Glacier Bancorp	4.63%	$1.32	62.26%	2,574.26%	10.64	$3.16B	State commercial banks
CNQ Canadian Natural Resources	4.63%	$2.64	47.23%	27.89%	8.83	$62.54B	Crude petroleum & natural gas
IBTX Independent Bank Group	4.59%	$1.52	39.38%	14.98%	12.73	$1.37B	State commercial banks
TROW T. Rowe Price Group	4.58%	$4.88	73.60%	16.45%	17.45	$23.94B	Security & commodity brokers, dealers, exchanges & services
ALLY Ally Financial	4.54%	$1.20	34.19%	20.84%	6.49	$7.95B	State commercial banks
NRG NRG Energy	4.51%	$1.51	23.93%	126.80%	-4.22	$7.71B	Electric services

How to Invest in Dividend Stocks

Every dividend investor must be aware of four important dates for each dividend: declaration date, date of record, ex-dividend rate, and payment date. 

1. Declaration Date - This is when the Board of Directors announces that they will be paying a dividend. The Board of Directors must approve dividends every time they are paid. Once the Board of Directors has declared that the dividend payment will take place, they now owe those dividends to the stockholders. On this day, the Board of Directors will also announce the date of record and the date of payment. 
   
2. Date of Record - This is the day a company reviews its records in order to identify its shareholders.
   
3. Ex-Dividend Date - In order to receive dividend payments, you must buy the stock prior to this date. If you buy the stock after the ex-dividend date, the person from whom you bought the stock will receive the dividend. 
   
4. Payment Date - This is the day you receive the dividend payment. 

After a stock has been paid, the stock price will typically drop. This is because there is not another dividend expected for a while.

How do Stock Dividends Work? 

Let’s look at an example to more clearly understand how stock dividends work. Let’s say you have $1,000 invested in Company X. On the declaration date, you find out that the Board of Directors of Company X has announced that Company X is paying dividends of $0.05/share. The value of each share is $10, so you own 100 shares. You receive $0.05 for each of your 100 shares. That means you earn $5 simply for owning stock in Company X. You will then either receive a check or direct deposit for $5, or you can reinvest that $5 back into Company X.

Dividend Calendar

You can refer to a dividend calendar to find out which companies have upcoming dividend payouts. A dividend calendar lets you track companies with upcoming dividend payments. Companies will only appear on this list after there has been a dividend announcement.  

There are no rules defining when or how often companies can or must pay a dividend, though dividends typically occur on a periodic basis. The Board of Directors of each company chooses if, how, and when the company will payout dividends. Though companies that consistently pay dividends typically pay a quarterly dividend, many companies choose to pay twice a year, annually, or monthly dividends.

There are also times when a company may announce a one-time dividend payment. One-time dividend payments typically occur when a major event has happened that affects profits. For example, the company may have won a big case, or the company may be selling a portion of the business. 

Dividend Tax Rate

Nothing in life is ever truly free. Even though dividends are in some ways “free money” there are some strings attached. In this case, those strings are taxes. Shareholders typically must pay income tax or capital gains on the dividends they receive.  Many factors affect how much you’ll pay in taxes, including your current income bracket, the type of dividend, and if the dividend has any specific tax considerations.

For tax purposes, there are two types of dividends: non-qualified and qualified. For non-qualified dividends (also known as “ordinary” dividends) you’ll pay the same amount that you do for your regular income taxes. The exact percentage you pay for regular income taxes will vary depending on your tax bracket. The taxes on qualified dividends are typically lower. This is why, from a tax perspective, qualified dividends are the preferred stock.

What is Dividend Yield

If you are new to investing, you may be wondering, “What is a dividend yield?” This is a very important concept to understand before buying stocks that pay dividends. Without understanding the value of a dividend based on the per-share price of the dividend, then how can you calculate its value? This is where dividend yield comes in to play. Dividend yield allows you to compare how various dividends are paying stocks.

Not all dividend-paying stocks are created equal. Different companies pay different dividend amounts. But the value of a good dividend is more than just the total amount of the dividend because you must also account for the price of the stock. For example, let’s look at two companies that we’ll call Company A and Company B. 

Both Company A and Company B announce that they will be paying dividends. They announce that the dividend per share will be $0.20. It may seem like the dividends are of equal value, but you also need to consider the value of the stocks.

Let’s say Company A has a stock value of $100 per share, while Company B has a stock value of $10 per share. The dividends from Company B will provide a much better value to shareholders. That is because if you had $1,000 invested in Company A, you would have had ten shares. At twenty cents per share, you would have received $2.00 in dividend payouts. If you had invested the same $1,000 in Company B, you would have had 100 shares. At twenty cents per share, you would have received $20 in dividends. 

You would have earned ten times the amount in dividend payouts for the same amount invested, even though the price per share was the same.

How to Calculate Dividend Yield

The dividend yield formula can help you gain a better understanding of the value of a dividend and help you compare different dividend-paying stock. To calculate dividend yield, you divide the annual dividend by the current stock price. Let’s look at an example.

If a company has a stock price of $100 and pays an annual dividend of $3, you would divide 3 by 100 (3/100) and get 0.03. Dividend yield is described as a percentage, so you would say this specific stock has a dividend yield of 3%. You can then use this number to compare this stock to other dividend-paying stocks.

Let’s say a second stock is valued at $50 and has an annual dividend of $2. If you divide the annual dividend by the stock price (2/50) you get 0.04 or 4%. A high dividend yield is better, so even though this stock has a smaller dividend than the previous example, it has a higher dividend yield, and is therefore likely a better value. We say “likely” because there is no one metric that can decide if a stock is a good value or not. Many different factors come into play when determining whether or not a stock is a good investment, and you should consider multiple factors before making an investment decision.

An important note on dividend yield: Since it’s based on the stock price, as the stock price changes, so does the dividend yield. If the stock changes value throughout a day, its dividend yield also changes throughout the day. For example, to see the dividend yield history of the popular stock iShares Russell 2000 ETF, you can visit nysearca:iwm.

What are Qualified Dividends?

There are two types of dividends: non-qualified and qualified. The tax rate on non-qualified dividends is the same as it is on your regular taxable income. On the other hand, qualified dividends are taxed at the capital gains rate. 

In order for the dividends of the stock to qualify for the lower rate, certain conditions must apply. The first condition is often one of the easiest to meet. In order for the dividend to count as qualified, it must come from certain entities. These entities may be either U.S. corporations or qualifying foreign entities. Most companies that pay out dividends are qualified entities.

The IRS must also consider the dividend a dividend. This may sound strange, but the IRS does not consider everything that is called a dividend to be a true dividend for tax purposes. A few things may be considered dividends in the eyes of the company and an investor, but not in the eyes of the IRS. For example, any “dividends” that come from either co-ops or from organizations that are tax-exempt are not true dividends in the eyes of the IRS.

To receive the tax advantages of qualified dividends, you must also hold the stock for a certain period of time. The rules for the exact amount of time can be a bit tricky. Typically, you must own the stock for at least sixty days. Those sixty days must occur during the 121-day window beginning 60 days before the ex-dividend date, which is the day by which you had to own the stock in order to receive the dividend. 

Dividend Reinvestment Plans (DRIPS)

A dividend reinvestment plan is a useful investment strategy for long-term investors. When you're enrolled in a dividend reinvestment plan, instead of receiving cash for dividend payments, your money will instead be reinvested in the company that paid the dividend. Many companies offer a dividend reinvestment program, but for those that do not, most companies can be reinvested in through your broker. Though immediate cash may sound appealing, there are a few reasons to consider enrolling in a dividend reinvestment plan. 

First of all, if you own stock in a company you (hopefully) believe in that company and think that it will continue to grow. Therefore, investing more in the company makes sense. Also, if this company regularly pays dividends, then the more shares you own in the future, the more you will receive from future dividend payments.

Due to the power of compounding, owning more shares of dividend-paying stocks will only serve you better and better as time passes. This is because the more shares you have, the larger the dividend payment you receive, and the larger the dividend payment you receive, the more shares you can purchase through the dividend reinvestment plan. Over time, you can see how this cycle would continue to grow.

Typically, there is little to no commission cost in a DRIP. You also have the option of partially enrolling in a dividend reinvestment plan. For example, if you had 100 shares of a stock, you could have 50 enrolled in the dividend reinvestment plan and 50 for which you received a cash payment when dividends were paid. 

Dividend Investing Strategy

The best dividend investment strategy will depend on your overall financial goals. If you’re looking for a long-term investment strategy, you should consider a dividend reinvestment plan and choose stocks that work well with your long-term financial goals. On the other hand, if you’re looking for consistent income, a dividend reinvestment plan may not be a good option for you, and you may want to consider stocks with lower volatility.

There are many factors to consider when investing in dividends. One useful way to evaluate and compare different dividend stocks is with a dividend growth screener. This allows you to compare dividend yield, dividend stocks in certain sectors or industries, payment schedules, the average dividend growth over three years, and more. No matter what financial goals you have, it’s important to do your research before investing.

Should a Stock Market Investor Buy Dividend Stocks?

As with any financial decision, what’s right for you will depend on your unique financial needs. Keep in mind that dividend stocks should not be the only investment in your portfolio. By investing in only one area, you miss out on the potential other benefits that other types of investments offer. That being said, dividend stocks can be a great investment to include as part of a diversified portfolio. Dividend stocks can increase your stable income, or they can help you reach your long-term financial goals. With all the benefits and options out there, it makes sense to include dividend stocks in your investment portfolio.

Now that you know more about dividends, you can see why they can be a useful part of your investment strategy. Dividends allow you to receive part of the profits of the companies that you invest in. Picking dividend stocks isn’t always easy, but there are helpful metrics that can help you understand their value. One of the key metrics used to compare dividends is the dividend yield. This number is a percentage that helps an investor understand the value of the dividend in relation to the price of the stock.

When investing in dividends it also helps to understand how tax rates affect dividends. There are two types of dividends: qualified dividends and non-qualified dividends. Taxes apply differently to these two types of dividends, so plan your investment strategy carefully. If you’re looking for a long-term investment, consider enrolling in a dividend reinvestment plan. This way, dividends are reinvested in the company. Before you begin investing, it’s important to have a solid understanding of dividends, their tax implications, how to compare their value, and how to make the most of your money by reinvesting dividends.

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