Best dividend stocks

Dividends offer a stable income source and a pathway to financial growth. However, it is not so easy to find the best dividend stocks. Read on to find out what the best dividend stocks are and which ones should be at the top of your shortlist if you are looking to generate passive income this year.

What is dividend investing?

Investing in dividends means putting your money into stocks of a company with the expectation of receiving a portion of the company's profits, known as dividends, as a reward for being a shareholder.

Companies are not required to pay dividends, but if they make a profit, they can choose to distribute some of it to their shareholders. This decision is usually proposed by the company's Board of Directors and voted on by the General Shareholders' Meeting.

If approved, the company will specify the date of dividend payment, the amount to be paid, and the cut-off date by which you must own shares to be eligible for the dividend.

Therefore, investing in dividends is making investments aimed at taking advantage of the distribution of dividends with two objectives:

  • You can receive the dividend payments as cash, using them for personal expenses.
  • Alternatively, you can reinvest the dividends back into the same company or other investments, allowing your ownership stake to grow. This can lead to larger future dividend payments, thanks to the power of compound interest.

You can invest in dividends by purchasing shares of companies that pay dividends or by investing in specialized funds and exchange-traded funds (ETFs) focused on dividend-paying stocks.

What does dividend yield mean and how does it differ from the payout ratio?

Let's explore key concepts crucial for designing a dividend strategy:

  • Payout ratio: This represents the percentage of a company's earnings that it chooses to distribute to its shareholders as dividends. For instance, a payout ratio of 60% means that the company plans to distribute 60% of its profits to shareholders in the form of dividends.
  • Dividend Yield (Dividend Yield): Dividend yield reflects how much return you can expect from your investment through the company's dividend distribution. It is calculated by dividing the annual dividend per share by the share's market price. In simple terms, it measures the relationship between the annual dividends per share and the cost of a single share in the market.

For example, if a company's shares are priced at £8 each and it pays out two dividends, one of £0.20 and another of £0.08, the dividend yield would be 3.5% (8 x 3.5% = 0.28). This means that you can expect a 3.5% return on your investment through dividend payments.

The best dividends of 2023

Next, let's have a look at some of the companies listed on the London Stock Exchange with the highest expected dividend yields as per Morningstar.

Top 10 FTSE 100 dividend-paying stocks

  1. British American Tobacco – 8.75%
  2. Imperial Brands – 8.03%
  3. BT – 6.81%
  4. Lloyds Banking Group – 6.06%
  5. Schroders – 5.29%
  6. WPP – 5.13%
  7. Johnson Matthey – 4.41%
  8. Admiral – 3.84%
  9. GSK – 3.78%
  10. Unilever – 3.71%

For more information about British dividend-paying stocks, have a look at our best dividend stocks article.

7 Best European dividend-paying companies (5-year projected yield)

Here are some other foreign stocks with high five-year projected dividend yields:

  1. ABN Amro – Dutch company with a 4.9% projected yield
  2. TotalEnergies – French company with a 4.8% projected yield
  3. Koninklijke KPN – Dutch company with a 4.8% projected yield
  4. Iberdrola – Spanish company with a 4.4% projected yield
  5. BASF – German company with a 4.4% projected yield
  6. H&M – Swedish clothing company with a 4.2% projected yield
  7. BMW – German company with a 3.5% projected yield

How to invest in high-dividend companies?

You can invest in dividend-paying companies by choosing a stockbroker. A good stockbroker should have a few characteristics:

  • Licensed in the UK (by the FCA)
  • Low costs
  • Intuitive platform ideal for long-term holding

Here are our top three stockbrokers if you want to invest in dividend-paying stocks.

XTB

XTB is a multi-asset broker with access to more than 6,000 financial assets, among which 3,000 shares and ETFs stand out. You can also buy fractional shares, so it's ideal if you want to start with a lower budget and grow your investment over time.

  • 🏆 Regulation: FCA
  • 💲 Costs:
    • No commissions
    • Spreads starting at 0.5 pips
    • Inactivity fee: £10/month after 1 year of inactivity
  • 📈 Platform: xStation 5 (proprietary) and Mobile App

For more information, have a look at our XTB review.

DEGIRO

DEGIRO is one of the most popular European brokers, with over 2 million active accounts. It is suitable for long-term investors thanks to the wide array of real assets and a beginner-friendly investment platform.

  • 🏆 Regulation: FCA
  • 💲 Costs:
    • Commissions:
      • UK stocks: £1.75 + handling £1
      • US stocks: €1 + handling €1
      • European exchanges: €3.90 + handling €1
    • Inactivity fee: £0
  • 📈 Platform: Proprietary

For more information, visit our DEGIRO review.

Interactive Brokers

Interactive Brokers is one of the most popular brokers ideal for any strategy, investor profile, and preference. Here are some of its main features:

  • 🏆 Regulation: FCA
  • 💲 Fees
    • Commissions:
      • UK stocks: 0.05% of the traded value (minimum £3 per order)
      • European stocks: 0.05% of the traded value (minimum €3 per order)
      • US stocks: 0.005 per share (minimum $1 per order)
    • Inactivity fee: £0
  • 📈 Platform: Proprietary

For more information, visit our Interactive Brokers review or click on the button below to visit the broker.

How to find the best dividend stocks?

When searching for the best dividend stocks, there are certain characteristics to look for:

  • High yield: Look for stocks that offer an attractive dividend in comparison to their profitability. This is appealing to investors as it signifies a good return on their investment.
  • Steady growth: The best dividend stocks often belong to mature companies that maintain consistent, albeit slow, growth over time.
  • Low risk: Typically, these stocks have low volatility, providing a sense of stability.

What to consider when choosing the company?

If your investment philosophy focuses on dividends, consider these fundamental company parameters beyond just the dividend payout:

  • Continuous and stable growth: Look for companies with increasing revenue streams over time.
  • Low Debt: Companies with excessive debt may face financial instability. Ensure that the debt/profit ratio is favourable.
  • Competitive advantage: Companies with a competitive edge, such as owning patents or a significant market share, tend to perform well.
  • Long-term profitability: Pay attention to the company's history of maintaining dividend yields.

How to invest in dividend stocks easily?

If you want to make a diverse portfolio of dividend-paying companies, here is where to start:

Dividend kings

Dividend kings are companies that have distributed and increased their dividend for a period of at least 50 years.

For example, five of them are:

  • 3M
  • Emerson Electric
  • Target
  • Genuine Parts
  • Stanley Black & Decker

Check out our dividend kings article for the entire list of dividend king stocks.

Dividend aristocrats

Similar to kings, these companies have increased their dividends for at least 25 years:

  • AbbVie
  • IBM
  • T. Rowe Price
  • Federal Realty
  • Franklin Resources

Have a look at our dividend aristocrats article for an entire list of dividend aristocrats.

ETFs with monthly dividends

Investing in each stock separately can be quite costly – and nearly impossible to get a diversified portfolio if you are on a budget. In this case, you may want to invest in ETFs – or exchange-traded funds, which are baskets that already contain many dividend-paying companies:

  • Vanguard Dividend Appreciation
  • SPDR S&P Dividends
  • iShares Select Dividend
  • Schwab U.S. Dividend Equity
  • iShares Core Dividend Growth
  • Proshares S&P 500 Aristocrats
  • Vanguard Dividend Appreciation

Dow Jones Stocks with the best dividends is also a good place to start to find more stocks for your portfolio. If you are a beginner about to start your investment journey, find out how to create a stock portfolio.

Why invest in high-dividend stocks?

There are several reasons to consider investing in stocks that pay high dividends:

  • Dividend reinvestment: Reinvesting dividends can substantially increase earnings over time through compound interest. This compounding effect leads to the growth of capital.
  • Passive investment: Investing in dividend-paying stocks of well-established companies is a more relaxed approach. These mature companies offer stability and you don't need to adjust your portfolio unless they stop paying dividends or decrease the payments significantly so they are no longer qualifying for your dividend investing strategy.
  • Stability: Companies that consistently pay dividends tend to have stable behaviour, regardless of economic cycles. This provides investors with a predictable income stream.

Learn more about dividend investing

Summary

In summary, the list includes some of the companies offering the best dividends in 2023. However, it's essential to note that investing in dividends is a long-term strategy, and daily market fluctuations should not be a cause for concern. This approach is one of the best ways to start investing in the stock market.

FAQs

Why should I reinvest dividends, and how does it work?

Reinvesting dividends involves using your dividend payouts to buy more shares of the same company. It's beneficial because it leverages the power of compound interest, allowing your investment to grow exponentially over time.

Are high-dividend stocks a stable investment choice?

Yes, high-dividend stocks are often stable, even during market fluctuations. They provide a reliable income source and can offer stability, making them a favourable option for investors seeking consistency in uncertain times.

Is dividend investing suitable for beginners in the stock market?

Yes, dividend investing can be an excellent choice for beginners. It offers a less hectic and more predictable approach, focusing on established companies with a history of dividend payments, making it a good starting point for new investors.

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