Dividend investors are always on the lookout for stocks to invest in that will provide them with the income they need to meet their financial needs. Lately, though, fears about whether dividend stocks have gotten overvalued has made many would-be dividend investors leery of adding new names to their portfolios.
But with the Federal Reserve doing its best to convince the markets that it intends to keep short-term interest rates down for a considerable period of time, investors need to accept the fact that unless you’re unwilling or unable to accept the risk involved with the stock market, finding dividend stocks to invest in rather than accepting low yields on bonds and bank CDs is the best way to get the income you need. With that in mind, let’s take a look at the characteristics that make for the best dividend stocks right now, examining three examples you can invest in today.
What makes a perfect dividend stock?
When you’re looking for the ideal dividend stocks to invest in, you need to focus on three main things. First, the stock’s current dividend yield will tell you how much income you can expect right now. Second, looking at the stock’s history of dividend increases will give you hints as to the possible future growth of that income. And finally, examining how the dividend compares to earnings and free cash flow will reveal whether the current dividend is sustainable, both now and in the long run.
It’s hard to find stocks that meet all three of those criteria. Mortgage REITs Annaly Capital Management, Inc. (NYSE:NLY) and American Capital Agency Corp. (NASDAQ:AGNC), for instance, undoubtedly meet the first criterion, with double-digit dividend yields making them look especially attractive. But lately, both companies have had to cut their dividends, and their share prices have fallen in response to those dividend cuts. Moreover, although the companies have taken steps to hedge their exposure to the likelihood of rising interest rates in the coming years, the question remains whether those efforts will be sufficient to allow them to continue to profit from their highly leveraged business model when interest rate conditions are less favorable.
On the other hand, some stocks have very long track records of dividend growth, but their current yields aren’t adequate to make them suitable stocks to invest in for most investors. For instance, Franklin Resources, Inc. (NYSE:BEN) has raised its dividend for 32 years in a row, including a 7% increase last December. But the stock yields just 0.8% — less than half what the overall stock market pays in dividend yield.
For a good mix of positive dividend attributes, the following stocks offer a compelling combination of low payout ratios, long dividend histories, and attractive yields:
- Chevron Corporation (NYSE:CVX) has a 26-year history of raising its dividends every year, with a current yield of 3.4%. Big oil stocks have faced the challenge of finding ways to replace lost production volume from older wells suffering natural declines in output, but Chevron Corporation (NYSE:CVX) has done a better job than many of its rivals in replacing that lost production with new asset purchases in promising areas around the world. Despite an already attractive yield from a dividend that the company increased by 11% in May, a payout ratio of 27% shows that Chevron Corporation (NYSE:CVX) could easily keep boosting its dividend in the years to come.
