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The stock market is the best way to grow wealth but the trick is to choose the right companies to invest in. When you invest in stocks, you make money in two different ways: dividend and capital appreciation. A dividend is an amount distributed by the company to the shareholders and it can be a form of passive income but you can only make the most of capital appreciation when you sell the stock. Dividend income can be significant if you have invested in the right high dividend-paying companies.
Related: What is Dividend Growth Investing
In this article
What are dividend-paying stocks?
Dividend stocks are the companies that distribute a part of their earnings to the shareholders on a regular basis. Such companies are well-established in the industry and have a long track record of distributing earnings. This distribution is paid out in the form of additional stock or cash. These companies usually pay dividends quarterly but some also pay out a monthly dividend, annual dividend, or in the form of a special dividend during the year. You can also consider dividend investing to enjoy a consistent income. These stocks are known for their consistency in dividend payments but in case of difficult times, the companies may cut dividends to preserve cash.
A useful way to identify the sustainability of the company’s dividend payments is to check its dividend payout ratio. This is a ratio that measures the total dividends divided by the net income. It will tell the investors how much of the net income is being returned to the shareholders' by the company and how much is retained for growth purposes. In case this ratio is negative or exceeds 100%, it shows that the company has to borrow to make the dividend payments. It is a sign that dividend cuts could be near.
There is no ideal dividend payout ratio but financially strong companies have a ratio below 50%. Anything over 50% could be unsustainable.
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Overview of the top dividend-paying stocks
Company Stock | Best For |
Johnson & Johnson | Best dividend stock |
Microsoft | For conservative investors |
ExxonMobil | High dividend payout ratio |
PepsiCo | Legacy business |
Procter and Gamble | Resilient stock |
Coca-Cola | Retirement stock |
3M Co. | Relatively stable company |
Lowe’s | Solid cash flow potential |
Pfizer | Pandemic darling |
Chevron | Top dividend stock |
Top dividend-paying stocks
Johnson & Johnson
- Dividend yield: 3.39%
- Payout ratio: 64.15%
- Price: $146.35
Johnson & Johnson has 61 consecutive years of dividend growth. The company operates different healthcare segments and makes over-the-counter consumer staples like Neosporin and Band-Aid. It is diversified into three business segments which add to the growing revenue and has benefited the defensive dividend stock. This healthcare company has increased the payouts for three decades and counting. It increased the quarterly dividend in April 2024 by 4.2%, which makes it $4.96 per share annually.
Microsoft
- Dividend yield: 0.66%
- Payout ratio: 30.11%
- Price: $453.95
One of the largest companies in the world, Microsoft, has managed to increase sales while expanding its revenue sources. It is a solid tech company and is making big moves with each passing year. Its revenue sources make it an attractive feature for dividend investors. Besides the growing revenue, the company has a solid balance sheet with adequate cash and low debt, making it possible to increase the dividend. Microsoft has a 20-year streak of dividend increases.
ExxonMobil
- Dividend yield: 3.32%
- Payout ratio: 46.75%
- Price: $114.30
ExxonMobil has 25 years of consecutive dividend growth which makes it a top choice for dividend investors. The multinational oil and gas corporation could be worth so much more over the next five years. If you want to combine capital gains and regular dividend income, this is the stock to invest in. With a dividend yield of over 3%, the company has consistently increased its annual dividend since 2011. It is a safe stock that has shown a steady increase over the past five years. One of the best energy companies, ExxonMobil is set to benefit from the rising oil prices.
PepsiCo
- Dividend yield: 3.26%
- Payout ratio: 94.46%
- Price: $166.25
Beverage giant PepsiCo has become a household name today. The company has survived several market ups and downs and enjoys a rich legacy. It is no longer just a beverage business and has diversified into healthy snacks which currently generates a significant part of its annual revenue. PepsiCo has a dividend yield of 3.26% and it has increased dividends for 53 consecutive years. It enjoys pricing power in the industry and managed to report organic growth despite hiking product prices.
Procter & Gamble
- Dividend yield: 2.42%
- Payout ratio: 58.42%
- Price: $166.65
Consumer goods company Procter & Gamble is known for some of the biggest brands we cannot imagine living without. It has a diversified umbrella of consumer goods products and a global presence which helps enjoy steady revenue growth. A dividend aristocrat, Procter & Gamble has increased dividends for 68 consecutive years. The company enjoys strong free cash flow which allows it to hike dividends. It has been paying dividends for 133 consecutive years and is a top choice for a retirement portfolio .
Coca-Cola
- Dividend yield: 3.04%
- Payout ratio: 74%
- Price: $63.82
Undoubtedly, the best dividend stock you can buy today, Coca-Cola has raised its payout for 62 years in a row. One of the oldest soft drinks brands, it is a very powerful brand in the world. It is currently on an acquisition spree and has snapped up several drink markers, including energy drinks, sports drinks, tea, and coffee to remain relevant in the industry. The stock is considered a safe haven, ideal for the retirement portfolio.
3M Co.
- Dividend yield: 2.70%
- Payout ratio: 71.27%
- Price: $103.66
A top dividend stock right now, 3M (MMM), is the one that promises solid payouts. The company has a diversified revenue stream and operates in the healthcare, consumer goods, industry, and worker safety. Its current payout ratio is 71%, one of the industry's highest today. It is more common to see larger companies with established profits distribute dividends. But even the top dividend stocks tend to struggle in periods of rising interest rates. This is where 3M stands out.
Lowe’s
- Dividend yield: 2.10%
- Payout ratio: 37%
- Price: $219.31
Investing in a home improvement company may not seem exciting, but it is a great choice if you love dividend growth. Lowe’s has consistently raised its dividend for 52 years, and in the past decade, the payout has increased by a whopping 471%. There is a whole generation of DIYers who are spending a lot of money at Lowe’s, and this will help the company generate cash flow to eventually distribute amongst the shareholders.
Pfizer
- Dividend yield: 6.09%
- Payout ratio: 47.04%
- Price: $27.57
It is time to look beyond the Covid vaccine when it comes to Pfizer. The company is a top healthcare giant in the industry with several drugs in the pipeline. It has suffered due to the drop in revenue from Covid sales and the management has already factored its impact on the financials. It aims to completely recover from this revenue dip by 2025. While the stock has dropped and so has revenue, its the dividend yield remains impressive.
Chevron
- Dividend yield: 4.19%
- Payout ratio: 62.57%
- Price: $155.78
Oil and gas giant Chevron benefits from the rising demand and rising prices of oil. With crude oil trading close to $80 per barrel today, the company is generating significant revenue for its upstream and downstream business. It is a cash flow machine and has also invested in the hydrogen sector to make the most of the hydrogen boom. With a payout ratio over 60%, Chevron is one of the best dividend stocks to own.
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Dividend stocks or dividend funds
You can invest in dividend stocks in two ways: buying dividend stocks directly or through mutual funds like exchange-traded funds (ETFs), which further invest in dividend-paying companies.
With dividend mutual funds or ETFs, you have several dividend stocks in one investment. You make one transaction, and you will get a whole portfolio of the top dividend stocks. This fund will pay dividends to you regularly, and you can continue to reinvest them. It offers instant diversification, so when a company cuts dividends or suspends them, you can still count on income from the remaining. Reinvesting the dividends can enhance the return on investment since the dividends usually increase your return on the fund by a few percentage points.
Dividend Aristocrats
Investors who seek to generate income through dividends can search for high-yield dividend stocks, but they must consider consistency. This is where Dividend Aristocrats shine. The S&P 500 Dividend Aristocrats is an index that includes a few companies from the S&P 500, and to be a part of this index, the companies must have raised their dividends each year for 25 years, they should have the float-adjusted market cap at a minimum of $3 billion and their daily trading value on an average should be minimum $5 million.
These are companies with stable dividend payments that also offer high liquidity. If you do not want to research dividend-paying stocks, you can choose specific Dividend Aristocrats for your portfolio.
Best dividend-paying stocks summary
Company Stock | Price (as of close June 27, 2024) | Dividend Yield. (as of close June 27, 2024) | Revenue Growth |
Johnson & Johnson | $146.13 | 3.39% | 6.46% |
Microsoft | $453.62 | 0.66% | 13.97% |
ExxonMobil | $114.23 | 3.33% | (16.75%) |
PepsiCo | $166.25 | 3.26% | 5.88% |
Procter & Gamble | $166.67 | 2.42% | 3.82% |
Coca-Cola | $63.78 | 3.04% | 6.39% |
3M Co. | $103.80 | 2.70% | (4.5%) |
Lowe’s | $219.42 | 2.10% | (11.01%) |
Pfizer | $27.73 | 6.06% | (78%) |
Chevron | $155.78 | 4.19% | (18.4%) |
FAQs
What is a dividend yield?
A dividend yield is the annual dividend payment made by the company calculated as a percentage of the current price of the stock. It will tell you what to expect in income from the stock depending on the amount you would pay for it today. However, it is not the only factor to consider when picking dividend-paying stocks. You must choose a stable company with solid fundamentals to invest in.
What are the different types of dividends?
There are four types of dividends which include cash dividend, property dividend, stock dividend, and liquidating dividend. One of the most common dividends is the cash dividend which is a distribution of the funds. The stock dividend is paid out to shareholders in the form of new shares like a stock split. A property dividend is a rare occurrence where the company will give property in lieu of cash or cash equivalents and liquidating dividend is the amount a company pays during a partial or total liquidation.
Is dividend income taxable?
Dividend income will be taxable depending on whether it is qualified or non-qualified, your filing status, and the taxable income. The qualified dividends will be taxed at the long-term capital gain rate and non-qualified dividends or the ones paid by real estate investment trusts (REITs) are taxed at the regular income tax rate. So, the higher the tax bracket, the higher your tax liability.
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The bottom line
The biggest consideration when buying a dividend stock is the safety of the dividend. You must understand the dividend yield and look for one above 4%. If the dividend yield is very high, it could be a risky investment, and the payout could be unstable. Even the top growth stocks can experience volatility in the short term. There are many market factors that have an impact on the share price, and some of them have nothing to do with the business itself.
The companies listed above make great dividend investments but do not worry about the day-to-day price movements. Focus on the companies that have excellent business, high-yield, and stable income streams. The long term will take care of itself.
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Editor
Vandita Jadeja is a financial writer and editor at Joywallet. She loves to read and write about money and brings a decade of experience from the financial industry.
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