Introduction to dividend stocks
There are a few different ways to make money in the stock market.
You can buy low and sell high, of course, or you can short the market by selling high and buying low, or you can buy a bunch of dividend stocks, step back, and let the payouts accumulate.
Dividend stocks are stocks that pay more than just yields
Profitable businesses must decide what to do with their profits at the end of their respective fiscal years.
Some choose to reinvest their profits back into their business in the form of capital improvements, infrastructure or IT upgrades, or increased headcount, but some take a slightly different strategy and choose to pay those profits out to their shareholders. We call these payments “dividends”.
Invest in dividend stocks
Dividend stocks don’t always keep up with the broader market in terms of share prices, and growth stocks tend to reinvest their profits back into the business rather than paying them out in dividends, but that doesn’t mean say that dividend investing is a bad idea.
Think of it this way: If a company like IBM is able to pay a dividend year after year, regardless of the market or prevailing economic conditions, owning IBM stock almost guarantees a return on your investment even during bear markets and periods of economic stagnation.
And while dividend stocks may not always have the same share price appreciation potential as the rest of the market, their dividend payments provide a steady source of yield and a boost to overall stock performance. your investment
Who let the dogs out (of the Dow)?
The easiest and least time-consuming way to invest in dividends is an approach called the Dogs of the Dow strategy.
The Dow Jones Industrial Average, as you know, is a major stock index that tracks 30 of America’s largest public companies, many of which pay out dividends like clockwork.
The strategy is pretty simple: all you have to do is identify the 10 Dow stocks with the highest dividend yields (equal to the annual dividend / current stock price) and invest in them.
Why is the strategy called Dogs of the Dow, you ask? Great question, and the answer is also pretty simple: math.
A company’s dividend yield increases when its dividends increase, but it also increases when its stock price decreases, as long as the dividend remains the same.
The Dogs of the Dow strategy looks for companies with high and/or recently increased dividend yields, i.e. IE companies whose stock prices have recently fallen.
Stocks that have experienced big price drops don’t look very attractive (like dogs) to most investors, which is where the strategy gets its name.
The strategy is effective for a few reasons.
- Blue chip stocks (Dow Jones) are reliable earners and almost always recover their value
- Get a steady stream of dividends from reliable companies
- You get both the dividends and the potential upside of rising stock prices
Now that that’s out of the way, here are some of the best dividend stocks you can buy in 2022.
International Business Machines (IBM)
IBM is still a good company with a stable business model and a history of consistent quarterly dividends, although the days of “no one was ever fired for buying IBM” are long gone.
IBM shares are trading at $130.95 at the time of writing, and each share entitles its holder to a quarterly dividend of $1.65, equivalent to an annual dividend yield of about one 5%
Of course, a 5% annual return isn’t that great compared to the market’s 10% average annual growth, let alone the upside potential of some individual stocks, but there’s something to be said for consistent returns that are unaffected by market fluctuations. .
Last but not least, it’s worth noting that IBM is a stable, established company that’s pretty well insulated from market forces, meaning you don’t have to worry about whether your dividend payments will show up next quarter or in the foreseeable future.
Caterpillar is another stable and mature company with a long history of growth and consistent dividend payments.
What consistency are we talking about? How about never missing a dividend since 1933?
Its dividend isn’t that much, just $1.20 quarterly, an annualized dividend yield of about 2.5%, but that’s on top of the stellar 69% growth its share price has seen in the last five years.
Caterpillar is a solid investment by almost every count, and its 28 consecutive annual dividend increases strongly imply that its dividend payments will only increase in the future.
Essex Property Trust
What do you get when you combine a real estate investment trust that invests in West Coast multifamily housing with the West Coast housing crisis? Money, especially.
Essex Property Trust didn’t make this list because it’s a household name, it did because it’s a mature player in a no-brainer business that has posted consistent profits and increased its dividend 29 years in a row.
Its quarterly dividend payout of $2.20 per share may only mean an annual dividend yield of about 3%, but that single statistic doesn’t tell the whole story.
Not only has the company experienced sustained growth since going public in 1994, it has also increased its overall dividend by nearly 200% over the past 20 years.
Essex Property Trust isn’t going to change the world as we know it or make big waves in its industry any time soon, but you can bet it will continue to post solid numbers and pay dividends like clockwork.
Speaking of reliable but not necessarily exciting companies, have you met my friend Microsoft?
OK, a quarterly dividend of $0.62 with an annual dividend yield of 0.85% isn’t great, but Microsoft has some good things going for them.
For one: Microsoft is a global player with decades of proven performance. This is nothing to be sniffed at.
Microsoft’s stock price has also soared nearly 300% over the past five years, not too bad for a corporation that’s nearly 50 years old, so you can expect its stock to continue appreciating (unless should something terrible happen) in addition to dividend payments.
And speaking of dividends, think about IBM for a second. Your dividends have increased as your business has matured and your capital has found fewer productive outlets, right?
Think of it this way: Microsoft has posted 12 consecutive years of dividend increases, and doesn’t indicate any major moves in expensive new business lines, so it’s not unreasonable to think they could keep raising their dividends over time ( like IBM.In case you don’t follow it).
Lowes is another established company with a long history of paying dividends and a consistently growing business (seeing a pattern here?).
Its current dividend of $1.05 per share per quarter only represents an annualized yield of 2%, but there’s plenty of upside potential with the stock itself.
Although it’s down from its peak earlier this year, Lowes’ share price has grown 160% in the past five years, and the current housing market means that the DIY and home improvement trend the home will continue for some time.
Dividend investing is not for everyone. It involves holding a lot of stocks for a long time, not too attractive for people with itchy kitty fingers, and better suited to patient investors looking to follow a long-term plan.
In general, it’s a good idea to have at least a few dividend-paying stocks in your portfolio for cash flow, reinvestment, and inoculation against market forces, so definitely don’t dismiss dividend stocks when looking for new opportunities. investment .