Dividend yield is a very important metric that should be taken into account when picking a stock. Stocks that pay dividends usually outperform their non-dividend paying peers over the long run and usually have lower volatility than the broader market. Moreover, the dividend is a sign that a company is financially healthy, has a steady cash flow and the management is committed to return capital to shareholders, so the stock is likely to enjoy growth over the long run, while investors also get to enjoy dividend payments.
Regular dividend payments also offer investors the opportunity to enjoy steady and regular payments, which is particularly important for retirement portfolios, while younger people can take advantage of the low risk profile of dividend stocks.
One of the best approaches to dividend investing is to stick to a dividend reinvestment plan, under which dividend payments are reinvested to buy additional shares of the company, with many companies offer this process to be done automatically and the transactions can be commission-free or the shares or fractions of a share can be acquired at a discount to the market price.
Copyright: jirsak / 123RF Stock Photo
When picking a dividend stock to invest in, it’s important to start with the dividend yield. While a higher dividend yield indicates higher returns, it’s important that the dividend paid by the company is sustainable, i.e. the company has the cash flow to keep paying dividends. Some stocks, such as REITs or MLPs have higher yields because they are required to pay out most of their profits as dividends.
For other companies, a high dividend yield can signal some financial issues. Sometimes, a company’s stock may lose value, but the management may choose to maintain the same dividend or even increase it, in order to show investors that the struggles are temporary. Therefore a further analysis into the company and industry is required.
One way to select the best dividend-paying stocks is to follow hedge funds. At Insider Monkey, we track over 650 hedge funds and analyze their quarterly 13F filings. We need the data to identify the best stocks in the small-cap space that best-performing hedge funds are collectively bullish on. We share these stocks with our premium subscribers in our quarterly newsletters (read more details here). In addition, we also issue a monthly activist newsletter that focuses on one activist fund each month and identifies the best ways to imitate it.
However, our data also allows us to monitor the hedge fund sentiment towards thousands of stocks, including those that pay dividends. We have selected a list of stocks with a dividend yield above 2.30% that saw the most hedge funds in our database holding their shares at the end of last year. We narrowed down the list further to pick those stocks that saw the largest increase in popularity over the last year.