The Best High-Yield Dividend Stocks In 2020

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High-yield dividend stocks are a prized commodity amongst income investors. Dividends exceeding the market average are one of the best ways to generate passive income on Wall Street. That said, it’s not enough to simply start positions in companies offering the highest yields; there’s a lot more that needs to be taken into consideration. At the very least, prospective investors need to consider numerous factors when determining the quality of high-yield dividend stocks: the company’s health, competitive advantage (moat), financial standing, track record, and industry—just to name a few indicators.

Failure to account for every variable will expose investors to risk, which is why it’s so important to understand everything there is to know about high-yield dividend stocks. Before you even think about the best high-yield dividend stocks in 2020, make sure you brush up on your fundamentals.

What Is A Dividend Stock?

A dividend stock is an equity traded on Wall Street, not unlike “growth” stocks. Much like their growth counterparts, shares of dividend stocks are bought and sold on all of the major indices: the S&P 500, the Dow, the Nasdaq, and more. When all is said and done, dividend stocks and growth stocks share more similarities than they do differences. It is worth noting, however, that dividend stocks do reward patient investors with one thing growth stocks can’t offer: a dividend yield.

As their names suggest, dividend stocks pay dividends to their shareholders, whereas “growth” stocks do not. That’s not to say dividend stocks can’t offer growth (they can), but rather that their dividend yield is coveted.

The dividend is a small payment on behalf of qualifying companies to shareholders. Investors will receive a small percentage of the stock’s value for each share they own, in the form of a dividend. The yield of the dividend and how frequently it is paid will depend on the company. In return, the businesses behind the stock will typically receive tax breaks at the corporate level.


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High-yield stocks

What Is Dividend Yield?

Dividends are payments made on behalf of companies to shareholders (reflected as a percentage of the stock’s price). As such, dividends may be paid monthly, quarterly, biannually, or annually. In addition to the frequency, the companies offering dividends also determine how much they will pay out each time. Consequently, some companies prefer to pay larger dividends less frequently, whereas others may choose to pay smaller dividends more frequently.

The variety of payments and schedules is so varied, in fact, that it is often hard to make an “apples to apples” comparison between dividend stocks. For example, Apple, Inc. (NASDAQ: AAPL) paid its most recent quarterly dividend to shareholders on August 13, 2020. The cash amount came out to $0.82 per share; that means investors would receive $0.82 for every share they owned at the time the dividend was declared. Provided the dividend remains unchanged, investors can expect to earn $3.28 per share each year ($0.28 x 4 quarters).

Realty Income Corporation (NYSE: O), on the other hand, pays its shareholders a monthly dividend. On October 15, 2020, each share of Realty Income netted its holders $0.234 over the course of a single month. Provided the dividend remains unchanged, investors can expect to earn $2.808 per share each year ($0.234 x 12 months).

It can be difficult to compare dividend stocks with each other, especially when considering share price, payment frequency, and the forward dividend rate. Fortunately, there’s a financial ratio that allows us to make more accurate comparisons: the dividend yield. Dividend yield is a financial ratio that allows investors to compare dissimilar dividend schedules and amounts.

More specifically, a dividend yield takes the same concept of a dividend and extrapolates it over the course of a year. Always expressed as a percentage, dividend yields are simple financial ratios that tell investors how much each share of a dividend stock will pay in dividends each year relative to its price.

How To Find High-Yield Dividend Stocks

Finding high-yield dividend stocks is as simple as searching brokerages for companies currently offering the highest yield. The information is displayed front and center, along with the stock price and everything else investors need to know. That said, there’s a huge difference between stocks that simply offer a large dividend and quality dividend stocks.

In other words, investors shouldn’t make their investment decisions based solely on the size of a company’s dividend. Oftentimes, in fact, large dividends that seem too good to be true are red flags. According to Jason Hall at the Motley Fool, “High yields can be the result of a stock that’s fallen because the dividend is at risk of being cut. That’s a dividend yield trap.”

While high-yield dividend stocks are a great addition to any portfolio, it’s not enough to covet the yield itself. Focusing solely on the yield and ignoring everything else is the surest way to make a poor investment. Instead, investors must evaluate everything they can about the stock and the company. Truly great yields will come from companies who have demonstrated an increased propensity for the following:

  • Consistency: Identifying a good dividend stock starts with looking at its payment history. The ability to grow a dividend, whether it be in times of prosperity or downturn, is a sign of strength. The Dividend Aristocrats, for example, have grown their own dividends for at least 25 consecutive years. While not always the case, companies who have proven they can maintain their dividends in the past are more likely to maintain them moving forward. Track records are invaluable in the world of income investing.

  • Financial Stability: A high-yield dividend stock must be supported by solid financials. For a dividend stock to even be considered by investors, it should have a good balance sheet; that way it can make sure investors get their payments every time. Poor financials are a sign of a struggling company and could result in a dividend suspension or cut.

  • Profit Margins: Businesses are responsible for paying dividends, and they will only be able to do so if their profit margins allow as much. Therefore, it’s important to make sure the company is making enough to continue paying said dividends. Anything less will put even high-yield dividend stocks in jeopardy.

  • The Moat A moat is a competitive advantage, and invaluable to the long-term prospects of a dividend stock. With a secure moat, investors can rest assured their dividends will remain protected and continue paying over time.

  • Potential: Dividend stocks shine as long-term investments. For a high-yield dividend stock to be worth considering, it must exercise the potential to stick around for years, decades even. Therefore, investors will want to evaluate a company’s potential moving forward. That way, they can ensure their dividend for years.

The Benefits Of High-Yield Dividend Stocks

The advantages of investing in dividend stocks are relatively straightforward. The benefits of high-yield dividend stocks are in their name: dividends. That said, dividends might offer more of an advantage than many new investors realize. Let’s take a closer look at the benefits of high-yield dividend stocks:

  • Compounding Income: Dividends are an obvious benefit associated with high-yield stocks. However, the true benefit is brought to light once those returns are reinvested through a DRIP (dividend reinvestment program). Brokerages allow investors to reinvest their dividends in the stocks they originate from, compounding income for years and years.

  • Appreciation: While high-yield dividend stocks are inherently incapable of realizing the same growth rates as some of today’s best growth stocks (their dividends prevent them from scaling further), they may still exhibit growth. In fact, the best dividend stocks may be considered growth stocks too. As a result, lucky investors will be able to simultaneously receive income in the form of dividends and watch their portfolio increase in value.

  • Sound Fundamentals: For a company to pay a dividend in the first place, they must first be financially sound enough to even make the payments. As a result, most companies don’t start making dividend payments until they are healthy enough to support doing so. That’s not to say all dividend stocks are “healthy,” but rather that it’s a good indicator of a successful stock.

  • Risk Aversion: Dividend stocks can be held in several industries, which increases diversity and reduces risk. Not unlike traditional stocks, dividend stocks can vary dramatically, which can really help investors avoid market volatility.

The Risks Of High-Yield Dividend Stocks

High-yield dividend stocks, not unlike any other investment, are subject to risks under extenuating circumstances. While they have proven they belong in a diversified portfolio, there are certain pitfalls investors need to be aware of, not the least of which include:

  • Dividend Traps: High-dividend yields may look attractive to the untrained eye, but companies with dividends that appear too good to be true can be a dangerous investment. While not always the case, incredibly high dividends may be used by businesses in distress to attract stock traders. It is entirely likely the dividend is still high after a stock price pullback, and the dividend hasn’t been cut, so be aware.

  • Poor Financials: Simply because a stock pays a high dividend, doesn’t mean they can continue to pay it. If the company doesn’t have enough cash flow or enough money to keep the business up and running, there’s a good chance that dividend won’t last much longer.

  • Interest Rates: Dividend stocks are adversely impacted by rising interest rates. When rates rise, dividends become less attractive than other, safer government securities.

5 Best High-Yield Dividend Stocks

There are a number of high-yield dividend stocks investors should consider in 2020, but here’s a list of some with the most promising futures:

  1. Verizon Communications Inc. (NYSE: VZ)

  2. Microsoft Corporation (NASDAQ: MSFT)

  3. Mastercard Incorporated (NYSE: MA)

  4. Brookfield Renewable Partners L.P. (NYSE: BEP)

  5. STAG Industrial, Inc. (NYSE: STAG)

Verizon Communications Inc.

Currently trading around $58.04, Verizon Communications Inc. is just below its 52-week high. Nonetheless, many people familiar with the communications industry view Verizon as not only a value stock but also a great dividend stock. Thanks, primarily, to being one of the largest 5-G companies on the market, Verizon is well-positioned to take advantage of what is turning out to be a great leap in telecommunications. The company’s proven track record and promising future make the current 4.32% dividend yield incredibly attractive. On top of all that Verizon has going for it, this stock appears poised to benefit from both growth and dividend increases.

Microsoft

Most people are aware Microsoft has been one of the best-performing stocks of the last few decades, but fewer may be aware that it’s a dividend stock. While not the highest yielding stock on this list, the company’s proven track record and promising future suggest there is room to grow the dividend. In particular, Microsoft’s growing prevalence in the cloud-based industry suggests it will continue to be a leader in the tech industry for years. In that time, it shouldn’t surprise anyone to see the current 1.02% dividend yield increase, along with the stock value.

MasterCard

Already synonymous with today’s most popular credit cards, Mastercard Incorporated represents a pure-play in the fight against cash. As the pandemic continues, fewer people are willing to work with cash, and Mastercard appears to be one of the biggest beneficiaries of the transition. That, in addition to its already sizable market cap and low-risk business model, Mastercard is in a great position to grow. As more people transition away from cash, there’s a good chance the company’s dividend will grow.

Brookfield Renewable Partners

Brookfield Asset Management Inc. is an alternative asset management company focusing on real estate, renewable power, infrastructure, and private equity. Brookfield Renewable Partners, on the other hand, are an extension of Brookfield Asset Management; one that looks positioned to benefit from a “greener” future. As the company’s name suggests, Brookfield Renewable Partners owns and operates renewable energy infrastructure. With most already moving on from fossil fuels, Brookfield Renewable is expected to pick up a lot of the slack. With multiple contracts signed for decades down the road, the company’s dividend is very safe and expected to grow.

STAG

STAG Industrial, Inc. is a real estate investment trust looking to take advantage of the e-commerce boom. As more retailers transition to online sales, the need for warehouses increases, and STAG is in the perfect position to give retailers exactly what they need. STAG leases commercial property space that can be used to house the future of e-commerce, and its dividend is already attractive.

Summary

To be clear, the best high-yield dividend stocks in 2020 are entirely subjective. Every dividend stock which is publicly traded carries its own intrinsic value, and that value is worth more to some investors than others. In other words, investors view stocks through different lenses. What one investor views as the best high-yield dividend stock in 2020, another may write off entirely because it fails to see their specific criteria. Nonetheless, those listed above appear to have what it takes to thrive for the foreseeable future, and beyond. As a result, they are all candidates for the best high-yield dividend stocks in 2020.

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