When investing in stocks, capital gains and dividends are the two streams of income that investors earn. Usually, the capital gains are higher than dividends. However, dividends are more predictable and offer a regular stream of income. What are the best dividend stocks to buy and hold? Are dividend stocks a good investment? What metrics should you consider when investing in dividend stocks?
Are dividend stocks a good investment?
Dividend stocks are a good investment if you are looking at a regular income stream from your investment portfolio. Usually, the capital gains in stocks that pay a higher dividend are lower than those in growth stocks. Many growth stocks like Tesla and Amazon don't pay dividends. Instead, the growth stocks invest the money in their business. Mature businesses that don't have a lot of avenues to invest their money return the money to stockholders through dividends.
Dividend stocks are a good investment for retirees who want regular income from their investments. However, if you are a young investor, you should look at growth stocks that pay a lower dividend or none at all. Over the long term, growth stocks can offer higher total returns through capital appreciation.
Another fun reminder is that when I started my site in 2008 and up till 2013/14 I never heard anything against dividends.— Dividend Growth Investor (@DividendGrowth) October 30, 2020
After a brutal 13 years where stocks went nowhere, people loved dividends
Now that stock prices've gone up for 12 years,many question why we need dividends
What metrics to consider when choosing a dividend stock
The most important metric that you should consider while picking a dividend stock is the dividend yield. The dividend yield is the annual dividend divided by the stock price. A higher dividend yield means that you would earn a higher dividend on the stocks.
That said, it isn't easy to pick dividend stocks. A company may show a high dividend yield because its stock price has plummeted. Therefore, you need to look at various aspects of the company before investing. The aspects include:
- Choose companies that have a strong competitive positioning in the market.
- Look for companies with a sustainable business model that can deliver profits across the business cycle barring small hiccups.
- It's advisable to invest in companies that have manageable debt on their balance sheets.
- Companies that have a long track record of increasing their dividends and have maintained the dividends even in an economic downtrend are good dividend stocks.
Net worth 📉— Dividend Cultivator 💸🌱 (@DivCultivator) October 31, 2020
Cash flow 📈
That is the power of dividend GROWTH stocks.
Growing your income regardless of the craziness of the markets is the ultimate investor flex.
What are the best dividend stocks to buy and hold?
Also, it's advisable to pick dividend stocks from across different industries. Even the best analysis can go wrong. By picking dividend stocks from different industries, you can diversify your risk. We have identified the following dividend stocks that you should buy and hold forever.
- Warren Buffett’s Berkshire Hathaway is Coca-Cola’s largest shareholder. Coca-Cola has a strong moat and offers a dividend yield of around 3.2 percent.
- PepsiCo's business model is more diversified than Coca-Cola since it has a higher contribution from the food business. PepsiCo's dividend yield is around 3 percent.
- Nucor is the largest U.S.-based steel producer. Nucor's earnings are much more stable than its peers that produce steel in blast furnaces. The company has a consistent record of increasing dividends. Nucor's current dividend yield is 3.4 percent.
- TC Pipelines is a midstream energy company with operations in eight regulated interstate natural gas pipelines. The company has a strong dividend yield of 9.3 percent and should form part of your core portfolio.
- Johnson & Johnson is another dividend stock that you should buy and hold. The pharma giant generates stable cash flows. Johnson & Johnson's current dividend yield of 2.9 percent is quite attractive.
- Procter & Gamble is another stock that is a buy and a hold for dividend investors. The dividend yield is 2.2 percent. Procter & Gamble has a stable cash-generating business model.