Andrew Goldman has been writing for over 20 years and investing for the past 10 years. He currently writes about personal finance and investing for Wealthsimple. Andrew's past work has been published in The New York Times Magazine, Bloomberg Businessweek, New York Magazine and Wired. Television appearances include NBC's Today show as well as Fox News. Andrew holds a Bachelor of Arts (English) from the University of Texas. He and his wife Robin live in Westport, Connecticut with their two boys and a Bedlington terrier. In his spare time, he hosts “The Originals" podcast.
Dividends are like the Tom Hanks of investing. Who could dislike a two-time Oscar Best Actor game enough to commit so thoroughly to playing David S. Pumpkins? And who could dislike free money distributed quarterly by a public company to every one of its shareholders?
Dividends, by definition, are a regularly-issued taste of a company’s corporate profits paid on a per-share basis regardless of whether a stock happens to be up or down. Dividends by and large are more common with older, massive companies. Procter & Gamble pays them; Alphabet does not. It’s important to know a bit about how they work before hopping in bed with the first stock that offers a sexy 10% dividend yield. Just because dividends are high at a certain moment in time doesn’t mean they will always be so. Boards of directors may decide to raise or lower dividends depending on the financial health of the company. And some companies offer high dividend yields like colorful plumage to lure investors into buying dud stocks. There’s even a name for these nogoodnik equities: dividend value traps.Wealthsimple Invest is an automated way to grow your money like the worlds most sophisticated investors. Get started and we'll build you a personalized investment portfolio in a matter of minutes.
If you’re in the mood to dip your toe into dividend stock investing, what you should look for are companies that have an established track record not only of high dividend yields, but also long term stability of both delivering dividends but also stock price. Rising dividend yields might seem appealing but are not always a reason for stockholders to celebrate. In 2018, for example, Ford had a super high dividend yield of almost 7%, but this simply reflected the fact the stock had lost nearly 50% of its value in the prior 5 years. Dividend yields are directly tied to the stock price. Confused? You won’t be after the next section.
Why yields are the most important measurement of dividends
The dollar amount of dividends that a company offers is certainly important, but it’s essentially a meaningless number until you use it to compute the company’s dividend yield. Why is that? Since dividends are paid to investors on a per share basis, it doesn’t make a whole lot of sense to compare actual dividend dollar amounts to assess whether a company pays a lot back to investors. For example, Ford Motor Company pays a dividend of around 15 cents per share while Apple pays around 77 cents. So, it would seem like you’d make a lot more in dividends from Apple, right? But consider this: Ford stock’s been trading at around $10 per share while Apple’s stock trades at over $200 per share so a $200 investment in Apple would get you 77 cents in quarterly dividends but the same dollar amount in Ford stock would net you almost 300% more — $2.25. A dividend yield is the dividend you earn from owning a companies’ stock expressed as a percentage of a current share price. Dividend yield is a way to make an apples-to-apples comparison of dividends from one stock to another based upon how much the dividend represents as a portion of a stock price. Dividend yield is computed by diving the amount a company pays per year by the share price, so for example, if XYZ Corporation pays a $10.00 annual dividend on a $200.00 stock, the dividend yield would be 5%.
As math goes, computing dividend yield is about as simple as it gets.
Dividend yield = Annual Dividend/Share Price X 100
Dividend yield is always expressed as a percentage. As you can see by fiddling with a chart like this one showing Exxon’s historical stock price as it related to the stock’s dividend yield, when the stock price goes up, the dividend yield will go down as the dividend represents a smaller percentage of the stock price, and vice versa. So, a falling stock price generally means a higher dividend yield.
The only thing that would make so-called dividend aristocrats cooler is if they actually wore monocles. So what exactly are they? A true dividend aristocrat is any S&P 500 company that raised its dividends for at least 25 years in a row, which is actually a pretty rare thing. Keeping dividend yields up for decades is tough, and there are currently only 57 companies that hold that title. Occasionally new companies get added and others fall off. Wikipedia keeps a current list.
Since they’re often established companies like Coca-Cola that market products that are recession proof, dividend aristocrats have shown themselves to perform relatively well in both up and down markets. During the 2008 global financial crisis, for example, the S&P 500 declined 37%. The hardy dividend aristocrats index only declined by 22%.
Though we’re by no means recommending any specific stocks, we put together a list of the 25 dividend aristocrats that as of August 15, 2019, boast the highest dividend yields. One word of caution to keep in mind: investments are speculative and it’s important to understand that past results should never be understood to be guarantees, but rather imperfect predictors of future performance.
|Leggett & Platt||LEG||4.25%|
|Wallgreens Boots Alliance||WBA||3.49%|
|Federal Realty Investment Trust||FRT||3.15%|
|Johnson & Johnson||JNJ||2.92%|
|T Rowe Price||TROW||2.89%|
|Illinois Tool Works||ITW||2.73%|
|Procter & Gamble||PG||2.58%|
Canadian Dividend Aristocrats
Our southern neighbors aren’t the only ones who can claim to produce dividend aristocrats. In fact, as of April 2019, there are 84 Canadian dividend aristocrats, boasting an average dividend yield of 3.31%. We’ve assembled a list of ten of those aristocrats that as of August 15, 2019 offer some of the highest yields.
|Bank of Nova Scotia Halifax||BNS||5.23%|
|Canadian National Resources||CNQ||4.78%|
|Bank of Montreal||BMO||4.49%|
|Royal Bank of Canada||RY||4.20%|
|Imperial Oil Ltd.||IMO||2.69%|
ETFs containing dividend stocks
Could there be anything finer than owning a few shares of a dividend aristocrat? Why yes, in fact there could. How about slivers of dozens of dividend aristocrats? While dividend aristocrats by and large tend to be relatively stable stocks, grouping a number of them within an ETF will naturally reduce volatility. Here are four ETFs that offer exposure to classic dividend aristocrats as well as their international counterparts.
|SPDR S&P Dividend ETF||SDY||0.35%||Tracks S&P High Yield Dividend Aristocrats Index.|
|ProShares S&P 500 Dividend Aristocrats ETF||NOBL||0.35%||Tracks S&P 500 Dividend Aristocrats Index|
|SPDR S&P Global Dividend ETF||WDIV||0.40%||Does not track an index, but all companies have had 10 successive years of dividend increases|
|ProShares S&P MidCap 400 Dividend Aristocrats ETF||REGL||0.40%||Tracks S&P MidCap 400 Dividend Aristocrats Index|