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You may have just learned about dividend stocks and how they can pay you pure passive income while growing your assets in the stock market.
Maybe you’ve read up on our crash course guide to dividend stock investing, and are raring to sink your teeth into the market and make some moves.
Today we’re sharing our favorite dividend stock picks for 2021 with you, talking a bit about each, and showing you why we like these stocks.
If you haven’t heard about it yet, dividend stocks are stocks that pay you income for owning them. Most dividend stocks pay quarterly, and each dividend stock is different.
Dividend stock investing is a fantastic way to wield the power of compound interest for wealth development, and in 2021, dividends are becoming an increasingly popular tool to build personal wealth.
It’s important to research each dividend stock you’re considering buying, because, like potential employees, each have a different work ethic, performance history, and reliability.
Unreliable workers, friends, and dividends, usually lead to losses and other bad situations.
First things first, a big disclaimer:
This list is our personal preference, and is not professional financial advice.
We highly encourage you to take notes to refer back to this list as you research each of these dividend stock picks on your own.
The easiest way to lose money in the stock market is taking someone else’s word for granted, and not informing yourself enough.
This list contains great value for you – we’re giving you the keys to the kingdom, but this should only be one piece of a greater wealth of research you’re conducting on your own.
Find reputable sources that disagree with our featured stock picks here, understand the theory and logic behind each school of thought, come to your own informed conclusion, and make damn sure you know where you’re putting your hard earned money.
Before we dive into our top ten for 2021, we want to examine the mechanics and principles behind dividend stock investing, and what makes a solid and reliable dividend stock.
The Strategy Behind Dividend Stock Investing
There are several approaches to building any investment portfolio, and there are different times where conflicting strategies may be correct or beneficial.
An investment strategy focused on aggressive growth may take on riskier investments with higher payouts. A more defensive strategy may prioritize higher amounts of diversification instead of focusing on single stocks with higher returns.
With everything in finance, each decision bears a trade-off of potential benefits and hindrances: there’s never a strategic approach that’s always strictly better or always correct.
However, dividend stock investing is somewhat specific, and requires a nuanced understanding of the big picture in order to consistently make correct moves.
Specifically, you must understand the history and current state of the company whose dividend stocks you are considering purchasing.
With dividend stocks, you are purchasing ownership of companies that have seen prolonged success, and have essentially ‘won the business game’ in their respective markets.
These companies have grown and expanded to the point that their market saturation is very high – they can’t grow much further, but they can sustain their large profits.
To compete with other companies whose stock continues to grow in value, they offer dividends, and pass on some of their profits to you.
These companies use dividends as a powerful incentive to keep their investors with them long term, instead of selling off their stock that doesn’t grow as much as some newer stocks would.
Because dividend stock investing hinges on the sustained success of a company, it is extremely important to know and consider the company’s history and stages of success.
Some “little details” about dividend stocks that are a BIG deal:
- Companies can stop offering dividends at any time, at a moment’s notice
- Dividend payouts are a set amount per stock (I.E. $4.37 dividend yield per share), but are referred to in a percentage payout
- Because a stocks’ dollar value can fluctuate, a dividend yield can look high in its payout percentage right after a stock’s value lowers significantly
- When this happens, companies usually stop giving dividends, as they are unsustainable for the company
- Buying these high dividend yield stocks without research can result with you having no dividends, and holding worthless stock that doesn’t grow
This is a scenario that has befallen many newcomers to dividend investing, and must be avoided at all costs.
The key strategy for dividend investing is pursuing conservative, sustainable, diversified returns first.
Then, within that grounded safe approach, you have some margin with how aggressive or defensive you would like to go.
Now that you know what to avoid in your dividend stock journey, we can move forward in identifying what metrics qualify the best of the best dividend stocks.
What To Look For In A Reliable Dividend Stock
The criteria below is what lead us to choosing our top ten list for 2021.
These traits in a stock are key identifiers that they are safe and a solid pick for dividend investing.
1. Long-Term Profitability And Growth Expectations
In order for a company to reliably pay out dividends, they need to see long periods of sustained profit and gradual growth.
Because they have reached a maintained level of success, the growth doesn’t need to be anything wild, but they should have consistent growth projections of around 5% – 15% more profit each year.
The stats that will show you this performance are the annual earnings per share and the growth of a share year over year.
2. Well-Established Companies
With dividend stocks, usually the more boring a company is, the more reliable their payouts will be.
Companies whose total market value are around $10 billion or more are the standard. If they’re “smaller fish” or underdogs in any degree, they stand to hold more risk, and are less likely to continue paying dividends.
The bigger and more “boring” the company, the better!
Likewise, among the “big fish” companies, we prefer to purchase stock that has at least an average day trading value of $20 million. This ensures the stock is both attractive to the market and is freely available to continue to buy into down the road.
3. Dividend Track Record
A great indicator of the health of a dividend stock is its’ track record.
Ideally, a qualified stock should have at minimum 5 years of consistent dividend payouts.
Obviously, the longer the track record, the more qualified the stock.
The cream of the crop will also show to increase the dividend payments gradually over time (not the dividend yield percentage, but rather the actual dividend payout per share).
Most of the stocks within my dividend portfolio are dividend aristocrats. These are companies that have been consistently paying dividends while growing them each year for 25+ years.
4. Lower Debt Loads
As the saying goes, it takes money to make money. Even big blue chip companies will utilize debt as a means for capital when necessary.
It’s important to just be aware and keep track of the debt load of your stocks:
Debt payments typically decrease dividend payouts.
Dividends again are essentially the sharing of a company’s profits in small amounts.
In a healthy situation, a company would be wise to utilize its extra profits to pay off any outstanding debts – often diminishing your dividends.
Furthermore, debt is still a red flag. A considerable debt load can signal that a company is not stable in general.
5. Sector Trends
As we’ve said before, the secret to dividend investing is understanding the bigger picture.
When looking at an individual stock, consider the health of the industry they’re in as a whole:
- Are their competitive peers seeing any big wins or taking any losses?
- Are there any founded rumors or fears or doubts in the industry’s future?
- Is this industry being disrupted by any new technologies or other sectors?
- Is the industry seeing any technological innovations to make them stronger?
- Are there new regulations or taxes being placed on this industry that could affect your dividend provider?
It’s never a bad choice to put your ear to the pavement and consider the word on the street.
6. Payout Ratio
Another indicator of stock health is the payout ratio between the dividend payout and stocks’ growth. The dividend payout of any qualified dividend stock needs to be lower than their earnings.
If the payout is higher than the dividend stock’s earnings, then the dividend itself is simply unsustainable, and the dividend will most likely be turned off in the near future.
There needs to be a balance of share appreciation and dividend growth in order for the wheels to keep on turning.
The sweet spot to look out for is right around a 35%-55% dividend payout ratio.
This shows the company is keeping most of the profits for themselves, while they’re also still sharing with their investors – everything is as it should be, in a healthy state of flux.
7. Dividend Yield
A big newbie mistake when it comes to dividend investing is taking the dividend yield at face value.
The dividend yield is the payout amount of any dividend stock, written as a percentage of the stocks’ market value.
Without understanding the full picture, including all of the other major factors we’ve discussed thus far, the dividend yield of any given stock doesn’t provide enough information to make a grounded investment decision.
Generally speaking, a payout percentage from anywhere between 2-4% is often safe.
Higher dividend yield percentages aren’t a red flag outright, but rather a big sign to be cautious – it may still be a healthy dividend to invest in, but requires extra care during your research and consideration.
Industry sector is also a large factor in determining specific dividend yield percentages. Depending on the industry a stock belongs to, it may be healthy even though it has a higher dividend yield.
Without Further Ado, Our Top Ten Favorite Dividend Stocks For 2021…
With each stock, we will be highlighting their stats using the criteria we’ve shared, as well as some key details for you to start your research with!
10: National Grid (NGG)
Market capitalization: $43.24 billion
Stock Value: $59.67
Dividend yield: 5.31%
Dividend payout ratio: 116.13%
Consecutive years of dividend increase: Decreased in 2020 payouts.
The National Grid is a UK-owned publicly regulated utility company in the UK and America.
NGG isn’t seeing the most growth, but it is a consistent utility company in dividend mode.
As you can see, they have a dividend yield of 5.31% – a little high. Likewise, their payout ratio is over 100%, clocking in at 116.13%. Over the last 5 years, their stock value has even dipped about 2%.
On paper, these dividends look a little shaky, and may not even be sustainable.
Behind these stats, National Grid is revamping several business processes involving renewable energy, and their short term numbers don’t look the best.
However, they have provided solid dividends throughout their history, and when they’re finished making their current moves, should continue to be a strong, dependable dividend stock.
Also, major utility companies are often very stable, as their success entirely hinges on that reliability. Not one, but several countries depend on the National Grid in more ways than one to function.
This is another example of how researching a single company beyond their “stats” is extremely crucial, and potentially profitable (again, don’t take our word for it either – research NGG and all these picks on your own).
9: Apple (AAPL)
Market capitalization: $2.23 trillion
Stock Value: $133.94
Dividend yield: 0.6%
Dividend payout ratio: 20.25%
Consecutive years of dividend increase: 8
As you can see above, Apple’s numbers are a bit different from what we’ve described prior as a ‘solid dividend stock’. With just a 0.6% dividend yield, and a 20.25% payout ratio, Apple is ‘barely’ a dividend stock.
However, that’s actually the beauty of it – Apple is such a big company, and they’re still in growth mode (while still paying dividends)!
Apple is a fantastic mix between a growth stock (buy and hold for profit) and a dividend stock.
If you don’t know about Apple, the tech products, phones, and computers have a rabid fan base, and their stocks have had a critically acclaimed performance for many years.
While this stock does pay a dividend, it’s more of a bonus on top of AAPL being a supreme growth stock. Grab some, and you get the best of both worlds.
8: McDonald’s (MCD)
Market capitalization: $171.71 billion
Stock Value: $208.71
Dividend yield: 2.4%
Dividend payout ratio: 53%
Consecutive years of dividend increase: 43
While you may or may not eat at McDonald’s, their dividend offering is surprisingly healthy.
Their dividend yield sits at 2.4%, with a lot of great room for growth considering their payout ratio of 53%.
The biggest factor about MCD’s dividend is that they’ve been steadily increasing their dividend payouts for 43 years – nothing to scoff at.
McDonald’s profitability is also not what you might expect: the money coming through the front door is mainly through the sale of their food to lower and middle income families.
This indirectly means that market conditions don’t affect MCD’s profit margins all that much – poorer communities are usually limited in their options for food regardless of the market, and this benefits McDonalds’.
However, their main strategy is actually through buying the land the stores are located on, and leasing them out to independent franchise owners.
Through this method, the success or shortfall of a single McDonald’s falls on the independent restaurant owner instead of McDonald’s, and the corporations’ profits remain steady.
They’re basically landlords collecting rent, and this makes the dividends very reliable.
Another thing to note: McDonalds is almost everywhere in the US, but it’s still expanding globally, using this same method of profitability.
7: Emerson Electric (EMR)
Market capitalization: $54.97 billion
Stock Value: $83.68
Dividend yield: 2.5%
Dividend payout ratio: 58%
Consecutive years of dividend increase: 63
A powerful manufacturing and industrial company, EMR took a hit from the COVID pandemic but is on a steady rebound.
Their dividend yield is right in the sweet spot at 2.5%, with a large room for growth with a dividend payout ratio of 58%.
Emerson Electric provides a wide variety of technological advancements to many industrial processes, including both innovations in equipment and software automation of business functions.
EMR stock has grown over 100% in the past 5 years, and has a history of beating their earnings expectations. They also have a history of overpaying for new acquisitions when they make moves, which is a potential risk for shareholders.
Because EMR has their hands both in the backbone industry sector, and the ever-expanding tech sector, by the books, they are extremely well positioned as a dividend stock pick.
A great investment prospect to research, with a pretty interesting position.
6: Caterpillar (CAT)
Market capitalization: $127.03 billion
Stock Value: $191.45
Dividend yield: 2.2%
Dividend payout ratio: 54%
Consecutive years of dividend increase: 28
Caterpillar is a giant in manufacturing and construction, and has been dominant in their sector for many years.
They have been increasing their dividend payout for 28 consecutive years, and their yield sits at 2.2% with a dividend payout ratio of 54% – a very safe prospect by the numbers.
Overall, CAT has been a solid company. They feature prominent offerings in different segments, making their revenue highly diversified, and their management continues to make their company more efficient every year.
Their stock value has also increased by over 200% in the past 5 years.
On the other hand, CAT is also sensitive to the swings of the economy, as their main demographic is construction companies.
Caterpillar is a great example of a big, boring company that provides solid dividends to its shareholders.
5: Lowe’s (LOW)
Market capitalization: $145.09 billion
Stock Value: $169.88
Dividend yield: 1.6%
Dividend payout ratio: 17%
Consecutive years of dividend increase: 58
Lowe’s has been steadily increasing their dividend payout for a consecutive 58 years, which is golden.
Even after that streak, their dividend payout ratio is only a mere 17%, which is a ridiculous amount of room for dividend growth.
Recently, Lowe’s has experienced an increase in cash flow due to being able to stay open during the pandemic, and saw over 43% growth in the past year.
Often this leads to a company re-buying their own shares to consolidate their assets, which in turn drives up the value of a stock because there is less overall buyable supply.
Lowe’s certainly checks all the boxes for a solid dividend aristocrat.
Look up more details about their LOW’s performance, and learn more about their company’s management and history, and see if you can locate any areas of caution or red flags for yourself!
4: 3M (MMM)
Market capitalization: $113.93 billion
Stock Value: $175.48
Dividend yield: 3.5%
Dividend payout ratio: 65%
Consecutive years of dividend increase: 62
Minnesota Mining and Manufacturing is a conglomerate corporation that owns a variety of different brands in many diverse sectors (pretty cool for investors, because the company itself is diversified out of the box).
3M is the definition of big boring company, and are known for their safe plays in the stock market world.
Their dividend yield is at a higher 3.5%, and their payout ratio is something to have caution about sitting at a high 65%.
However, they have been consistent in their annual dividend increase for 62 years.
Recently, they have been prioritizing healthcare-related products (like masks) and home improvement, which has bolstered their stock value.
While they are heavily investing in their R&D to stay competitive, some of their developments and engineering talent are being scooped up by sexier tech companies.
To some, 3M may seem like a clunkier dividend stock at this time. To others focused on a longer term, 3M may rather just be experiencing regular business plateau.
It is up to your research and acumen to decide where you stand.
3: Microsoft (MSFT)
Market capitalization: $1.93 trillion
Stock Value: $243.00
Dividend yield: 0.87%
Dividend payout ratio: 33%
Consecutive years of dividend increase: 11
Similar to Apple, Microsoft is largely a growth stock, with a solid dividend potential attached.
Everyone who uses a computer understands how successful MSFT has been for almost half a century.
While their stock looks ‘young’, the momentum and hold on their respective industry is anything but, and even glancing at their dividend stats, it seems like up is the only way to go from here.
Their dividend payout currently sits at a small 0.87%, with a menial payout ratio of 33% to match.
As well as this, their stock value has increased by over 300% in the last 5 years.
Plenty of room for growth, in a largely dominant tech giant corporation.
2: Coke (KO)
Market capitalization: $228.86 billion
Stock Value: $48.77
Dividend yield: 3.4%
Dividend payout ratio: 78%
Consecutive years of dividend increase: 57
A Warren Buffet certified stock pick, Coke is a global beverage company that is seemingly too big to fail.
They have destroyed their competition, being three times larger than their biggest competitor.
Though Coca-Cola itself may not be as popular as it once was in the face of recent fitness trends, the company has been diversifying its offerings to different brands of seltzers, water beverages, and soft drinks.
Historically, soft drink companies have been very safe investment picks, and Coke has been very wise in capitalizing on consumer trends and updating their offerings.
On paper, their dividend payout ratio is a bit high, but 57 consecutive years of dividend increase is the real deal.
1: Proctor & Gamble (PG)
Market capitalization: $333.22 billion
Stock Value: $128.95
Dividend yield: 2.5%
Dividend payout ratio: 62%
Consecutive years of dividend increase: 64
Proctor & Gamble has been paying dividends since the year 1890, and is the definition of the “big boring company”.
P&G owns many manufacturing brands for essential goods like toiletries, hygiene products, household appliances, and other consumer staples.
Because of their stranglehold on this corner of the market, and their sector being essential in many ways, P&G sees success regardless of the economic cycle’s wrath.
P&G is ancient, and has a long history of outperforming their earnings expectations.
Even on paper, their stats are air tight.
A 2.5% yield, a healthy 62% payout ratio, and they’ve been increasing their yield for 64 years in a row!
Big, safe, boring, solid dividends. Just like we wrote it up.
Bonus Value: Red Flags To Watch For When Making Dividend Investments
When you’re surveying any potential dividend investment, be sure to keep these filters in the back of your head.
1. Dividend Payout Ratios Over (or Around) 100%
Again, the dividend payout ratio is a percentage of how much of a company’s total profits are being paid out into dividends.
If a company is paying more in dividends than they’re earning, they won’t be able to sustain their payouts.
This is also usually true of companies whose payout ratios are in the high 60’s or above.
2. Unsustainable Dividend Yields
As we’ve stated before, a dividend yield is expressed as a percentage value of a stock’s pricing, but in truth the dividend itself is a fixed dollar amount.
You will find stocks whose dividend yield is in the 8-11% range. Most often, this is a short term reflection of data that is in fluctuation…
More often, this is a huge red flag for a dividend stocks’ overall health.
3. Companies With A Short Dividend Track Record
When it comes to dividend investing, long term, safe, and boring is what you want to look for.
Whenever a newer company comes out with a dividend offering, it’s wise to still approach any potential investments with them viewing them as a growth stock, as opposed to a true dividend investment.
A general rule of thumb is that you want your dividend payers to have consistent dividend growth of at least 5 years.
4. Investing In Obsolete Sectors
Every year, different industries are disrupted by innovations coming from new technology, government regulations, automation, and other factors.
For example, oil may be a somewhat suspicious investment prospect to those who keep up to date with renewable energy developments.
If you’d like a more in-depth guide to dividend investing mistakes, we’ve got a comprehensive video for you here:
Some Things To Remember
Just in case we haven’t swayed you (or annoyed you to death) with our main takeaway, we will repeat it again here:
Before investing into any specific stock, make sure you thoroughly research your investment prospects.
A great website to look up an aggregate of data on specific stocks is Market Beat.
Additionally, we intentionally avoided heavily mentioning the acclaimed “Dividend Aristocrats” during this article, to teach about the fundamentals of what makes these dividend aristocrats solid investment picks.
Dividend investing is a tried and true method of building passive wealth by leveraging the stock market in a specific way.
We hope you’ve enjoyed our presentation, and wish you the best in your dividend adventures.
Never take anyone’s word for it, and happy hunting!