
Buying a dividend paying stock
Lesson in Course: Stocks (beginner, 8min)
Instead of buying dividend paying ETFs, I want to buy individual stocks with dividends. What do I need to know?
As shareholders in profitable companies, we can expect cash payments from the earnings from the company. These cash payments, or dividends, provide income for us and also other benefits to our portfolio.
Picking dividend stocks
While it's tempting to find the highest paying dividend, the best dividend stocks are companies that have a steady business and consistent profits.
Slow and steady
Companies with stable and growing businesses can afford to pay dividends regularly and grow the amount paid over time. Investors prize these companies for their steady cash flow and have given nicknames to groups of companies. A dividend aristocrat is a company that has increased its dividend consistently over 25 years. In contrast, a dividend king is a company that has increased its dividend consistently over 50 years!
Company | Sector | Years | ||
---|---|---|---|---|
American States Water (NYSE:AWR) | Utilities | 66 | ||
Dover Corporation (NYSE:DOV) | Industrials | 65 | ||
Emerson Electric (NYSE:EMR) | Industrials | 65 | ||
Northwest Natural Holding (NYSE:NWN) | Utilities | 64 | ||
Genuine Parts (NYSE:GPC) | Consumer cyclical | 64 | ||
Proctor & Gamble (NYSE:PG) | Consumer defensive | 64 | ||
Parker Hannafin (NYSE:PH) | Industrials | 63 | ||
3M (NYSE:MMM) | Industrials | 62 | ||
Cincinnati Financial (NASDAQ:CINF) | Financial services | 60 | ||
Johnson & Johnson (NYSE:JNJ) | Healthcare | 58 | ||
Coca-Cola (NYSE:KO) | Consumer defensive | 58 | ||
Lancaster Colony (NASDAQ:LANC) | Consumer defensive | 58 | ||
Lowe's (NYSE:LOW) | Consumer cyclical | 58 | ||
Colgate-Palmolive (NYSE:CL) | Consumer defensive | 57 | ||
Nordson (NASDAQ:NDSN) | Industrials | 57 | ||
Farmers & Merchants Bancorp (OTC:FMCB) | Financial services | 55 | ||
Hormel Foods (NYSE:HRL) | Consumer defensive | 55 | ||
ABM Industries (NYSE:ABM) | Industrials | 53 | ||
California Water Services (NYSE:CWT) | Utilities | 53 | ||
Stanley Black & Decker (NYSE:SWK) | Industrials | 53 | ||
Federal Realty Investment Trust (NYSE:FRT) | Real estate | 53 | ||
Stepan (NYSE:SCL) | Basic materials | 53 | ||
SJW Group (NYSE:SJW) | Utilities | 52 | ||
Commerce Bancshares (NASDAQ:CBSH) | Financial services | 52 | ||
Sysco (NYSE:SYY) | Consumer defensive | 52 | ||
Altria Group (NYSE:MO) | Consumer defensive | 51 | ||
H.B. Fuller (NYSE:FUL) | Basic materials | 51 |
Think of these companies as the Hondas of investing—they may not be fancy, but they will get you where you need to be safely.
Speedy rabbit
There are other companies in the stock market promising almost double-digit yields. Situations like these are usually too good to be true.
When a company stretches dividend commitments and has to cancel or cut dividends, the stock price drops, and we incur losses.
Also, we want to avoid dividend-paying companies with significant debt. Interest owed on the debt will eat into the cash available to pay dividends. In the liquidation hierarchy, debt and interest are always paid first before any dividends are issued out. Debt is reported on a company's balance sheet and also in the debt to equity (D/E) ratio for a stock. A good rule of thumb is to choose a company with a D/E ratio below 1.
Calculating the Yield
How do we compare dividend stocks? We can take the dividend payments and convert them to a percentage based on the share price to yield. This % yield informs us of the income-generating potential for each stock.
In February 2020, AAPL’s share price was around $309 per share, and the company declared a quarterly dividend of $0.77 per share. $0.77 is approximately 0.25% of $309—the quarterly yield is 0.25%.
Annual yield
To annualize the yield, we would add the dividends from the three previous quarters with a recently declared dividend and divide by the current share price.
In the case of AAPL, the company paid out a total of $2.31 in dividends per share before the quarter in February. AAPL paid $3.08 in annual dividends for the year, which is approximately a 1% yield of a share price of $309.

Alternatively, we can estimate an annual yield by taking the current quarter's dividend payment and multiplying by 4 to reach an estimated yearly payout. Then divide the payout by the current share price—$ 0.77 x 4 results in $3.08, which is the same result as above.
Yield and price
As we know, dividends can affect the stock price. We explain the two main reasons below.
Timing of dividends
When a company declares a dividend, the stock price will typically increase because short-term investors, who did not own any shares in the company, will buy shares to collect the dividend.
After collecting the dividend, these short-term investors would sell the shares, and the price would decrease. Fundamentally, after the company distributes the cash set aside for the dividend, the company value drops because the cash is no longer on the company's balance sheet.
Increase or decrease in dividends
Companies cancel or cut dividends in times of trouble, which causes the stock price to drop. The price eventually recovers due to the stabilization effects of yield.
A $5 dividend paid on $100 per share is a 5% yield, and a $5 dividend paid on $80 per share yields 6.25%. When the yield increases enough to be attractive again, investors will stabilize the share price by buying the stock.
When a company increases dividend payments, stock prices jump due to optimism while a declining yield limits the upward price movement. When the yield drops low enough, investors lose excitement and stop buying.
This push and pull between yield and stock price helps provide dividend stock stability and makes them great additions to our portfolios.
Supplementary materials
https://www.streetinsider.com/dividend_history.php?q=AAPL
This is a helpful website to look up dividend dates and current yield.
Actionable ideas
When looking at stocks, we should take note of the dividend yield. A stock with a 5% yield can earn our portfolio a return without even needing to increase in share value. We should also take a look at dividend-paying history and pick either an aristocrat or a dividend king.
Glossary
The dividend yield, expressed as a percentage, is a financial ratio (dividend/price) that shows how much a company pays out in dividends each year relative to its stock price.