Inflation plus rising interest rates on your variable debt may be putting the squeeze on your budget. There are two ways out of that problem: Lower your spending or raise your income.
If you have cash available to invest, high-yield dividend stocks can be a nice source of passive income. That income, along with some spending cutbacks, could get your budget to balance in short order.
The big challenge will be finding the right dividend stocks. In this scenario, you want assets that can deliver total returns greater than your cash savings account without being terribly volatile. That’s no small order, since the stock market has been unpredictable and cash accounts are paying 4% or more.
Here’s one approach. Start with S&P 500 companies. These are 500 of the largest public companies in the U.S. that meet the S&P 500 standards for profitability, liquidity and size. Screen those S&P 500 constituents by dividend yield and payout ratio. You can then dive deeper into each to decide which ones suit your requirements for growth, liquidity and leverage.
This doesn’t guarantee you’ll make more than a cash account over the next six months, but longer term, investing in equities will beat cash.
To get you started, the table below introduces nine S&P 500 stocks that yield 3.3% or more and have payout ratios of 50% or less. Keep reading for a description of what each company does and its dividend practices—plus some strategies and metrics you can use for further research.
Even at low levels, inflation destroys wealth, but at current rates it’s downright deadly. Defend yourself with dividend stocks that raise their payouts faster than inflation. Click here to download “Five Dividend Stocks to Beat Inflation,” a special report from Forbes.
Coterra Energy
Coterra Energy (CTRA) is an oil and gas company that develops, explores and produces gas, natural gas and natural gas liquids in the U.S. The company owns acreage in Pennsylvania and Oklahoma. Coterra also operates natural gas and saltwater disposal gathering systems in Texas.
Coterra pays a base and variable quarterly dividend in March, May, August, and November. The base dividend is $0.15 per share per quarter. The variable component fluctuates based on the company’s free cash flow. In 2022, the variable dividends totaled $1.89. Cumulatively, Coterra shareholders took home $2.49 per share in 2022 dividend payments.
Diamondback Energy
Diamondback Energy (FANG) is an oil-and-gas player that acquires, develops, explores and exploits natural gas reserves in Texas’ Permian Basin. The company owns roughly 490,000 acres and is in the process of acquiring at least 15,000 more.
Diamondback also pays a quarterly dividend with base and variable components. In May 2022, the company raised its annual base dividend 17% to $2.80 per share. The variable dividends in fiscal year 2022 to date have outpaced the base, totaling $6.16 per share.
Dow
Dow (DOW) develops chemicals, compounds, materials and coatings used for packaging, infrastructure, and consumer applications.
The materials producer pays a quarterly dividend of $0.70 per share in March, June, September and December. That dividend payout has been consistent since 2019. Between 2011 and 2017, Dow’s quarterly dividend rose from $0.25 to $0.46, but the company paid no dividend in 2018.
KeyCorp
KeyCorp (KEY) is a holding company for commercial and consumer financial institution KeyBank National. The Ohio-based bank operates roughly 1,000 branch locations across 15 states.
KeyCorp pays a quarterly dividend in March, June, September and December. The most recent dividend of $0.205 included a $0.01 increase from the prior quarter. Between 2019 and 2022, the bank increased its dividend three times, from $0.17 to $0.205.
Best Buy
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BBY
Best Buy (BBY) is a retailer that sells technology products and services plus appliances on its website and through 1,205 retail locations in the U.S. and Canada.
Best Buy’s 2022 quarterly dividend was $0.88 per share, paid in January, April, July and October.
The tech retailer has made some sizable increases to its shareholder payout over the last few years. Best Buy shareholders collected a cumulative $2.20 per share in 2020, $2.80 in 2021 and $3.52 in 2022.
Comerica
Comerica (CMA) is a Texas-based bank that offers consumer and commercial banking, plus investment management and brokerage services. The bank operates in Texas, California, Michigan, Arizona, Florida, Canada and Mexico.
Comerica pays its quarterly $0.68 per share dividend in January, April, July and October. The bank did increase its dividend several times between 2015 and 2018. However, the per-share payout has been unchanged since April, 2020, after an increase of $0.01.
HP (HPQ) makes desktop and laptop computers plus printers and related equipment for use by consumers and businesses. The company changed its name to HP Inc. from Hewlett-Packard
HPQ
HP pays a quarterly dividend in January, April, July and October. The most recent payout in January, 2023 was $0.2625 per share, an increase of $0.0125 from the prior quarter. In 2018, HP’s quarterly dividend was $0.1393—it’s nearly doubled since then.
Regions Financial
Regions Financial (RF) is an Alabama-based bank that provides consumer and commercial banking and related services, including investment management, estate planning and insurance.
In 2022, Regions raised its quarterly dividend payment from $0.17 to $0.20. The bank pays shareholders in January, April, July and October, and has been raising the payout by a double-digit percentage annually.
United Parcel Service
UPS
UPS
UPS (UPS) provides transportation, logistics and related services domestically and internationally to consumers and businesses.
The shipping company pays its quarterly dividend in March, June, September and December. In 2022, the quarterly payout was $1.520 per share, a $0.50 increase from the 2021 dividend. UPS has increased its dividend annually for the last 13 years. What To Look For In Dividend Stocks
Even at low levels, inflation destroys wealth, but at current rates it’s downright deadly. Defend yourself with dividend stocks that raise their payouts faster than inflation. Click here to download “Five Dividend Stocks to Beat Inflation,” a special report from Forbes.
What To Look For In Dividend Stocks
How you identify good dividend stocks depends on your investment goals and risk tolerance.
Let’s say you can tolerate some risk and you want to generate cash quickly. In that case, you might look for companies with strong growth projections that are committed to generous shareholder distributions. You’d likely lean into real estate investment trusts (REITs) and traditional stocks that pay out variable, earnings-based dividends.
Alternatively, maybe you’ll take a softer line on yield because you’d like the income to be reliable. This is the more common investor approach to dividend stocks. Here, your analysis will touch on dividend yield, but also delve into the company’s dividend track record, sales and cash flow growth performance, dividend payout ratio and return on invested capital.
The point is, it’s critical to clarify your own objectives first. From there, it’s a natural next step to define personalized parameters for acceptable dividend stocks.
How To Pick High Yield Dividend Stocks
Those parameters will likely include some or all the metrics defined below. As you dive into stock research, though, you’ll see that no company outperforms in all areas. So you’ll have to compromise. Let your investment objectives and risk tolerance guide you.
Dividend Yield
Dividend yield is the company’s annual dividend payment per share divided by the stock price. To get to the percentage value, you’d multiply the result by 100.
For context, the dividend yield of the S&P 500 is about 1.7%.
If you’re considering investing your cash savings in dividend stocks, it may be tempting to compare dividend yields to the APY
PY
Dividend Track Record
History doesn’t predict the future. Still, you can make conclusions about a company’s priorities and ability to create value by looking at its dividend track record. Maintaining a competitive dividend for decades requires consistent growth in profits and cash flow.
A history of dividends also requires discipline with respect to decision-making. Corporate leaders can use cash in many ways, from strategic acquisitions to share buybacks. Good dividend-paying companies find a balance between funding growth initiatives and rewarding their shareholders.
Dividend Payout Ratio
The dividend payout ratio divides cumulative dividend payments by the company’s net income in the same period. If a company makes $100 million and pays out $75 million in dividends, the payout ratio is 75%.
Dividend payout ratio is an indication of how sustainable a dividend is. A company that pays out 90% or more of its earnings probably can’t withstand a sizable downturn without cutting the dividend. That’s why many investors prefer dividend payout ratios to be less than 80%.
There are industry exceptions, however. REITs, as an example, are required to distribute at least 90% of their income to maintain their tax status.
Return On Invested Capital
Return on invested capital (ROIC) measures how well a company uses its resources to generate profits. The calculation is net operating profit after tax divided by invested capital, which is debt and equity plus any cash generated from financing and investing.
All else being equal, a higher ROIC is better. The company with a higher ROIC is generating more value per dollar, which translates to more funding for growth, acquisitions, share buybacks, and/or dividends.
Analysts commonly compare ROIC to a company’s weighted average cost of capital. ROIC should be the higher of the two numbers—that means the company is creating value.
Sales And Cash Flow
FLOW
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FLOW
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Growth in sales and cash flow funds dividends and dividend increases. Ideally, you want to see a history of moderate growth. Fast-paced growth isn’t ideal for the dividend-payer because that growth requires capital. Sluggish growth, on the other hand, may not generate enough capital for business expansion plus shareholder dividends.
Company guidance and analyst growth projections are also useful to you as a dividend investor. A flat or negative outlook could impact your future dividend payments, yield and the value of your shares.
Investing For Income
Stock investing—whether you’re seeking dividends or not—is a long-term play. Funneling excess cash into dividend stocks may produce income in the short-term, but it’s not a quick financial fix. Plan on keeping your money invested for five years or more. That timeline can help you avoid unnecessary capital losses.
As soon as you are financially able, consider reinvesting your dividends. You’ll build your share count and wealth potential faster—which puts you solidly on the road to financial independence.
Five Top Dividend Stocks to Beat Inflation
Many investors may not realize that since 1930, dividends have provided 40% of the stock markets total returns. And what is even lesser known is its outsized impact is even greater during inflationary years, an impressive 54% of shareholder gains. If you’re looking to add high quality dividend stocks to hedge against inflation, Forbes’ investment team has found 5 companies with strong fundamentals to keep growing when prices are surging. Download the report here.
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