Highest Dividend Stocks
Income investors looking for a good return on their investment often look for the highest dividend stocks, or more precisely, the highest yielding dividend stocks. This can also be a good place for value investors to look for potential buy candidates because high dividend yields can be caused by a stock price being temporarily low (i.e. undervalued stocks), which simultaneously raises the yield. However, the highest dividend stocks can also be a dangerous place to find buy candidates.
Normally when income investors are looking for dividends stocks, they are looking at monthly dividend stocks or stocks that pay dividends quarterly with the highest yield (adjusted for risk). The issue with the highest dividend stocks on the top dividend stock list is that they are usually amongst the most risky stocks a conservative income investor will look at. Many of these stocks have high dividend yields because the underlying stock price has fallen, while the dividend payment is presumably staying the same, giving the appearance of a high yield. Stocks with high dividends should raise a flag with any income investor to be extra diligent doing their homework. The biggest question you’ll need to ask yourself is whether or not the dividend is safe?
The first thing an income investor should screen for in stocks paying dividends is whether or not the stock is consistently profitable. As they say on Wall Street, profits drive dividends, and many times, stocks with high dividends are also losing money – their dividends place them on the highest dividend stocks list because of the additional risk.
Another attribute that you should look for in profitable top dividend stocks is how well their earnings cover their dividends – also known as the dividend payout ratio. Ideally, you want to see a stock paying out less than 50% of it’s earnings as dividends. If the high dividend stocks you are looking at have a dividend payout ratio of 50% or less, the dividend has a higher probability of being safe – in other words it is less likely to be reduced or cancelled.