Do you like dividends? How about high dividends? If you answered yes to both of those questions...then you’re in the right place!
I recommend you spend the next 5 minutes of your life reading this article. They’ll be worth it - promise. 🙂 Let’s begin with the obvious question...
What is Considered a High Dividend?
I normally consider anything over 4% to be a high dividend. Some people agree, some people disagree.
But what’s certain is that if you get a 4% dividend and a stock appreciation of 6%, you’re golden. That means you’re getting a 10% yearly return, which will compound your money very quickly.
In fact using the Rule of 72, every 7.2 years your money would double.
Have a look below:
Not bad! Basically divide 72 by the rate of return to quickly work this out. It's a very handy rule! Now...
Before you scroll to the bottom of this article, fire up your brokerage account and get ready to buy, it’s important to get one thing very clear.
Be very mindful of very high yields! They almost always are a trap. They will seem very appealing and evoke feelings of "easy money"... But they are the opposite.
I often see people saying things like:
“This stock has a 14% yield! That’s a guaranteed return right there!”
So they buy the stock only because it has a high yield. No research, plan, or logic. Please don't be one of those people!
What often happens is that the company is not making enough money to cover the very high dividend and is forced to cut it. What follows is a sharp drop in stock price and immediate regret.
While those people got their 14% dividend, they had to sell their stocks at a 30%+ loss, making this a very bad investment.
Focus On The Payout Ratio
A quick way to ensure you're not walking into a yield trap is to look for a very important metric. It's called the payout ratio. You get it by dividing the dividend per share by the earnings per share.
It very quickly tells you how much money a company is paying in dividends compared to how much money they made.
- If this is over 100% it's bad news - the company can't cover the dividend and often will have to use debt.
- Anything over 70% is risky, and a bad year might endanger the dividend.
- The sweet spot is between 40 and 60%.
While it doesn't tell you the full story, looking for the payout ratio is a quick way to check whether the dividend is safe. Next time you see a dividend over 8%, check the payout ratio.
But let's take this even further...
Want to know what types of stocks offer high yields and also low payout ratios?
Blue Chip Stocks
In poker, the best chips are blue.
There are fewer of them and they have the most value. That's why some stocks are also called blue-chip stocks.
They are companies that are big, stable, and very resilient to bad economic climates. And guess what?
They are the exact kinds of companies that you want to invest in! When you focus on investing in high-quality companies, you know you're in good hands.
Examples of High Dividend Blue Chip Stocks
Now let me share a few blue-chip stocks that might be worth a look. All of these are dividend growth stocks.
That means that they have a history of increasing their dividends every year. They are some of the best investments you can make.
Westrock Company (WRK)
A packaging company that's enjoying the rise of e-commerce mainly thanks to Amazon.
At the time of writing, it sports a high dividend yield of 5.1%. This is high no matter where you look at it!
And the payout ratio? It currently stands at only 55%, meaning that Westrock has plenty of room to keep increasing that dividend. Not to mention the expected price appreciation!
PPL Corporation (PPL)
A utility company that delivers electricity to 10.5 million people. The kind of business model that makes for great dividend growth stocks!
At the moment, you're getting a good a 4.7% dividend yield with a payout ratio of 67%. Not the lowest yield, but very decent.
The highlight with PPL is that it has been increasing its dividend every year since 2002. Impressive! 😄
Prudential Financial (PRU)
This Fortune 500 company offers insurance and investment management services.
To be honest,I'm quite fond of this stock due to its excellent metrics:
First comes the great dividend yield at 4.6%...
Then there's the low payout ratio of 43%...
Finally, it has increased its dividend by an average rate of 13% over the last 5 years! These 3 factors combined make for a powerful cocktail of growth and wealth. Just what I like to see!
Don't Focus On Yield Alone...
Even though it might be tempting to chase yield to get immediate returns, I'd recommend you don't. High dividend blue-chip stocks definitely have a place in every portfolio.
They are especially useful if you're nearing retirement age. However, it's important to build a diversified portfolio of stocks that will also grow their dividends quickly.