When you buy a dividend stock, you have two ways to earn money – from the stock’s performance and from the dividends the stock yields. There is a catch though – you have to decide how you want to receive your dividends when you purchase the stock. Keep in mind that which ever method you use is taxable. If you receive your dividends as income, you can pay the taxes on that sum from the dividends themselves, but if you reinvest your dividends, you will have to pay taxes on the dividends you receive when they are disbursed, which could be a hefty amount out of pocket.
DIVIDENDS AS INCOME
The dividend amount will vary dramatically between companies but, in any case, if you invest enough, you could use your dividends to replace or supplement your income. Now, with this strategy comes certain risks – after all, the company could stop providing dividends at any time, or change the dividend amount.
DIVIDENDS AS RETURN
On the other hand, you could choose to reinvest the dividends. Reinvesting takes advantage of compounding interest to net you even greater returns. It also acts as type of hedging – if the stock performs poorly, the reinvested dividends can offset loss. Between the benefits of reinvesting (it’s like “free money”) and the hedging ability of reinvesting dividends, if you can afford to pay the tax bill, reinvesting can be extremely profitable, especially if the dividend yielding stock is a strong and consistent performer.
CHOOSING THE RIGHT DIVIDEND STOCKS
Choosing the right dividend stock is important. Whether you want to use the dividends as income or reinvest them, finding a stock that will consistently perform well while offering consistent dividends is critical to managing your investment portfolio – whatever your purpose. For example, a stock like the Coca-Cola Company has been consistently providing dividends, and consistently increasing them, for the last few decades.
To give you an idea what to look for, we compiled a list of stocks with dividend yields over 4% of their respective stock prices. Then, we narrowed the list to look only at those stocks that pay out less than 50% of their profits as dividends (“payout ratio”). This was done to help control the quality of the list. Next, we looked at the number of stocks that had the highest number of institutional purchases in the current quarter.
Here is a list of the stocks we came up with. You can use as a starting point for your own analysis:
- Sinclair Broadcast Group (SBGI) is a company that provides programming, operating and sales services to television stations in the US had a dividend yield of 5.17% and a payout ratio of 46.76%. It also has 2.1M in institutional purchases, which is over 4% of the company’s 50.81M float. Amongst the 300+ hedge funds we track, 14 have positions in SBGI, including Jim Simons’ Renaissance Technologies.
- TIM Participacoes (TSU) is a Brazilian mobile telecom company. It has a dividend yield of 5.12% and a payout ratio of 17.96%. TSU also has 13.3M in institutional purchases, which is almost 12% of the company’s 112.2M float. Amongst the 300+ hedge funds we track, 15 have positions in TSU, including Lee Hobson’s Highside Capital Management.
- NYSE Euronext (NYX) a securities exchange company. It has a dividend yield of 4.48% and a 33.93% payout ratio. NYX also has 14.0M in institutional purchases, which is over 5% of the company’s 261.37M float. Amongst the 300+ hedge funds we track, 27 have positions in NYX, including John Paulson’s Paulson & Co.
- Universal (UVV) is a tobacco leaf processor and merchant. It has a dividend yield of 4.48% and a payout ratio of 33.93%. UVV also has 1.5M in institutional purchases, which is almost 7% of the company’s 22.82M float. Amongst the 300+ hedge funds we track, 11 have positions in UVV, including David Dreman’s Dreman Value Management.
- Aircastle Ltd (AYR) buys, leases and sells jets to passenger and cargo airlines worldwide. It has a 4.31% dividend yield and a payout ratio of 35.40%. AYR also has 2.0M in institutional purchases, which is over 3.5% of the company’s 56.02M float. Amongst the 300+ hedge funds we track, 14 have positions in AYR, including Michael Novogratz’s Fortress Investment Group.
- Seagate Technology (STX) is a hard disk drive manufacturer. It has a dividend yield of 4.20% and a payout ratio of 30.28%. STX also has 26.7M in institutional purchases, which is almost 7% of the company’s 391.47M float. Amongst the 300+ hedge funds we track, 30 have positions in STX, including David Einhorn’s Greenlight Capital.