Dividend stocks are great investments for any portfolio, and for a few simple reasons.
Dividends—when a company distributes cash to its shareholders—are really just a form of profit sharing. Thus, as a general rule, companies that decide to pay dividends must generate meaningful profits in the first place. Furthermore, the best dividend stocks typically pay you regularly (often once per quarter, but sometimes at different intervals), which naturally hints at consistent and sustained success.
Despite this, selecting the best dividend stocks is no easy task. Some companies offer only a modest payday now, but have the prospect of a much bigger payout later as they experience earnings growth and then share that success with stockholders. Others pay dividends that are huge now but are infrequent or unsustainable.
Not all dividend stocks are created equal. So income investors interested in this asset class need to decide how to balance the need for “yield” and the need for stability and consistency in their holdings.
Today, we’ll look at what we believe are seven of the top dividend stocks for beginners as we enter 2023. But we’ll also help new income investors acclimate to the space by explaining some of the basics, which will help you identify new dividend opportunities in the future.
Disclaimer: This article does not constitute individualized investment advice. These stocks appear for your consideration and not as investment recommendations. Act at your own discretion.
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What Is Dividend Yield?
Perhaps the most important metric in this universe is known as dividend yield. This is a simple financial ratio that tells you the percentage of a company’s share price that is paid out across a year’s worth of dividend distributions.
Expressed as a mathematical equation, it’s simply:
Dividend yield = annual dividend / price x 100
The idea here is to normalize dividend payments regardless of stock price, different quarterly payments, even different payment frequencies (like monthly or annually). For instance, each of the following fictional stocks all have a dividend yield of 2.5%:
- Alpha Corp. currently trades for $40 a share. It pays a 25-cent quarterly dividend, for $1.00 per year in full. ($1 / $40 x 100 = 2.5%)
- Beta Inc. pays $1 in the first quarter, $2 in Q2, $3 in Q3 and $4 in Q4. That’s $10 in dividends for the full year. It trades for $400 a share. ($10 / $400 x 100 = 2.5%)
- Gamma Ltd. pays $2.50 just once per year. It trades for $100 a share. ($2.50 / $100 x 100 = 2.5%)
The idea is to focus on the percent of your initial investment you get back, and help you compare apples to apples.
Taking this math a step further, you learn that a company can suddenly feature a very high dividend yield through one of two very different ways: the share price falling very quickly, or the dividend growing very rapidly.
Alpha Corp., which trades for $40 per share, pays a 25-cent quarterly dividend that yields 2.5%. In a month, it yields 5.0%. Here are two ways that could have happened.
- Alpha Corp. doubled its dividend to 50 cents per share, for a full $2 per share across the year. The share price stays the same. ($2 / $40 x 100 = 5.0%)
- Alpha Corp. kept its dividend the same, but its share price plunged in half to $20 per share. ($1 / $20 x 100 = 5.0%)
Clearly, that 5% yield appears to be much safer and reliable in one scenario than the other.
How Does Dividend Growth Work?
Of course, yield is normally a function of what we know now—not how a business might change in the future. Many companies exhibit dividend growth over time.
There’s no universal rule about how companies might raise or reduce their payments, but generally dividend stocks tie these profit sharing plans to earnings growth.
In other words, if a company is making more profits, then they have more cash to spread around to shareholders. And if they hit a serious snag, there’s a chance dividends could be cut or eliminated to shore up finances.
What is a payout ratio?
As with dividend yield, it’s important to normalize the dividend payout ratio for a stock. This is simply the percentage of a company’s earnings per share that is being distributed via dividends. It’s calculated as:
Payout ratio = dividends per share / earnings per share x 100
As an example, a stock that makes $100 million in profits and has 10 million shares of public stock has $10 in earnings per share. And if that company pays $5 annually in dividends, it has a payout ratio of 50% ($5 / $10 x 100 = 50%).
What is yield on cost?
When you look up a stock’s information, the dividend yield listed is based on the most recent dividend and the current stock price.
That yield is often actually different than the one current shareholders enjoy. That yield is called “yield on cost,” which is the payout based on what you paid, at the moment you invested.
Let’s say you buy a stock at $100, and it pays $1 per share. It yields 1.0% when you buy it ($1 / $100 x 100 = 1.0%).
In a year, that stock has doubled to $200 per share, and it also doubled its dividend to $2 per share. If you look up its information, its dividend is still 1.0% ($2 / $200 x 100 = 1.0%).
That’s not your yield on cost, however. You’re still receiving that higher dividend of $2 per share. But your cost basis is still the original $100 you bought the share at. So now, your yield on cost has doubled, to 2.0% ($2 / $100 * 100 = 2.0%)!
The Best Dividend Stocks for Beginners
If you think all this math is tedious, you’re not alone! But remember: Not all dividend stocks look alike. They come in all shapes and sizes, and metrics like dividend yield and payout ratio help investors make more informed decisions.
As with many things on Wall Street, it’s misleading to look at just a single number in a vacuum. Whether you’re investigating share price or dividend payments or earnings per share, these metrics only matter when you can compare them fairly with another company’s performance.
Now that you have a basic understanding of how companies pay dividends and why measures like dividend yield are important, let’s move on to some of the best options for income investors right now.
Best Dividend Stock for Beginners #1: Coca-Cola (KO)
- Market value: $270 billion
- Dividend yield: 3.0%
- Sector: Consumer staples
Consumer staples stocks–-companies that make goods that are basic necessities—are some of the best dividend stocks because they aren’t prone to the ups and downs of discretionary companies. When times get tough, households spend less on vacations or designer jeans, but they keep going to the grocery store every week.
And when it comes to consumer stocks, Coca-Cola (KO) is a powerhouse that’s hard to top.
The Atlanta-based beverage company has a global scale with more than 130 years of operating history, and operations in 200 nations around the world. While it’s true that sugary soft drinks might not be a growth business in an age of healthy eating, it’s important to understand that Coke products have strong baseline demand—and beside, this multibillion-dollar powerhouse also owns brands including Vitaminwater, Fuze teas, Powerade energy drinks, Minute Maid juices, and many more.
It’s also worth noting that Coca-Cola has a great deal of institutional (large-investor) demand. Berkshire Hathaway (BRK.B)—the holding company founded by the world’s most famous investor, Warren Buffett—is KO’s largest shareholder. Berkshire holds more than 9% of the company and provides a strong foundation for share prices as well as a mandate for generous and consistent dividends.
That shows in the track record of KO stock: In 2023, the company approved its 61st consecutive annual dividend increase. That makes it a “Dividend Aristocrat”: A select group of stocks that have paid dividends without interruption for at least a quarter-century.
KO’s payout ratio of 75% is high but not dangerously so; it means dividend increases will be modest, but they’re also persistent.
Best Dividend Stock for Beginners #2: Consolidated Edison (ED)
- Market value: $34 billion
- Dividend yield: 3.6%
- Sector: Utilities
Utility stocks are another sector to consider when looking for the top dividend stocks. Electricity and water are just as important as groceries and cleaning products, and the expensive infrastructure and highly regulated nature of publicly traded utilities means competition is hard to come by. In truth, most U.S. electricity companies are virtual regional monopolies with incredibly consistent demand for their products.
That’s what makes a stock like Consolidated Edison (ED) so attractive to income investors.
“ConEd” distributes electricity to about 3.5 million customers in New York City and Westchester County, and natural gas to 1.1 million more. This dense area of the U.S. is certainly not going to be less reliant on energy anytime soon, translating into a nearly certain stream of revenue for this dividend stock.
This consistency has allowed ConEd, another Dividend Aristocrat, to provide 49 years of consecutive dividend increases to its stockholders. Like with Coca-Cola, the payout ratio is on the high side. However, it’s still manageable at less than two-thirds of next year’s earnings, and Edison features extremely stable earnings that can slowly but persistently grow over time—allowing its dividend to expand the same way.
Best Dividend Stock for Beginners #3: Equinix (EQIX)
- Market value: $76 billion
- Dividend yield: 1.8%
- Sector: Real estate
Generally speaking, tech stocks don’t make for good dividend investments. Most startups need to invest aggressively in new staff or new products rather than share profits with investors, and even established tech companies like Amazon.com (AMZN) tend to prioritize growth over dividends.
What makes Equinix (EQIX) such an interesting dividend stock, however, is that it’s a kind of hybrid between a traditional income investment and a tech operation.
EQIX is what’s referred to as a real estate investment trust, or REIT—a special class of company that involves property owners and operators. These companies receive special tax considerations, and in return, they must distribute at least 90% of their earnings back to shareholders as dividends.
This particular real estate company owns data center real estate. And it has a lot of reliability, charging regular rent to deep-pocketed tenants who want to buy server space in Equinix’s digital infrastructure empire. After all, everyone wants their data to live on “the cloud,” but the physical hardware to host that data has to live somewhere—and that somewhere is on Equinix’s properties.
EQIX boasts more than 440,000 interconnections to more than 3,000 customers to its data centers. It’s the leader in its field with a stunning 81 consecutive quarters of revenue growth—almost 10 years running, and the longest streak of any S&P 500 company.
That supports consistent dividends that income investors can rely on, even if the yield isn’t as big as other stocks on this list.
Best Dividend Stock for Beginners #4: Johnson & Johnson (JNJ)
- Market value: $448 billion
- Dividend yield: 2.9%
- Sector: Healthcare
There’s an old saying that the best dividend stocks are “widow and orphan” investments, because they are the kind of assets you buy and hold forever—or at least until you die and pass them on as inheritance.
Johnson & Johnson (JNJ) is the prime example of a “widow and orphan” stock. It is among the 10 largest stocks on Wall Street, with a massive brand and more than 135 years of operations. JNJ is also one of the most credit-worthy companies in the world, ranking as one of just two U.S. companies with a top AAA rating for its corporate debt. Microsoft (MSFT) is the other, if you’re curious.
From a dividend perspective, the healthcare giant has raised its payouts for 61 years running—one of the longest track records on Wall Street, making it an Aristocrat—but still has a payout ratio of less than 50%, hinting there’s ample headroom for future increases, too.
With a dominant consumer health business that includes Tylenol and Band-Aid products as well as high margin drugs and medical devices, this stock is deeply embedded in the healthcare system and a top dividend stock that income investors can rely on through any market environment.
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Best Dividend Stock for Beginners #5: JPMorgan Chase (JPM)
- Market value: $460 billion
- Dividend yield: 2.9%
- Sector: Financial
Keeping with the theme of entrenched giants that are going nowhere, it’s hard to imagine a time when megabank JPMorgan Chase (JPM) hasn’t dominated the financial sector. And thanks to massive operations and steady profits, it has long been a standby of dividend stock investors as a result.
Sure, the financial crisis of 2008 shook things up—and in fact, it even resulted in a short-lived dividend rollback for JPM. However, those dividend cuts were mandated by the Federal Reserve. And it’s worth noting that JPMorgan was the first major financial organization in the U.S. to eclipse its pre-crisis dividend levels. Specifically, in 2008, JPM was paying $1.52 annually before the downturn, but by the end of 2014, it had paid $1.56 per share.
Right now, it doles out an impressive $1 per share quarterly, or $4 annually—proof that CEO Jamie Dimon has earned his keep through profitable acquisitions of troubled peers like Bear Stearns and Washington Mutual during the crisis, and by a steady hand on the helm ever since.
This megabank has roots dating back to 1799, and is currently the largest U.S. bank by assets. If you’re a long-term income investor, JPM is the kind of financial stock you can believe in for many years to come.
Best Dividend Stock for Beginners #6: Prudential Financial (PRU)
- Market value: $35 billion
- Dividend yield: 5.8%
- Sector: Financial
Understanding that some beginners investing in dividend stocks might not see big banks as attractive as they once were in decades past, Prudential Financial (PRU) offers exposure to the financial sector in a different and more subdued way.
While Prudential does offer wealth management services, its core business comes from rather boring business lines such as life insurance and benefit administration for corporations. Unlike a big investment bank, there’s not really a lot of potential for windfall profits here. It’s just the mundane business of collecting premiums or helping small businesses manage their 401(k) plans.
That said, these admittedly boring business lines provide a lot of stability to operations. Prudential has steadily ratcheted up its paydays lately as a result, with dividends soaring from $1.60 annually in 2012 to $5.00 presently. That kind of growth over the past decade or so should make anyone pay attention, even if the company isn’t as dynamic as other financial firms.
The icing on the cake is the fact that even with one of the highest yields on this list, Prudential has a dividend payout ratio of less than half of its profits. That means those big-time increases in payouts aren’t just sustainable, but also have room for continued dividend growth in the years ahead.
Best Dividend Stock for Beginners #7: Verizon Communications (VZ)
- Market value: $143 billion
- Dividend yield: 7.7%
- Sector: Communication services
Another top dividend stock that has obvious staying power is Verizon Communications (VZ).
It is the No. 1 wireless carrier in America right now, with more than 140 million customers compared with a little over 110 million for T Mobile US (TMUS) and about 100 million for AT&T (T). And in an era where mobile connectivity is a must-have for consumers and businesses alike, there’s little chance of any widespread rollback in customers that would affect this dominant position.
What’s more, rather than chase subscriber market share in what has historically been a pretty entrenched marketplace, Verizon has instead focused on average monthly subscriber revenue lately in a bid to squeeze a bit more cash from the same people rather than engage in costly acquisition of new leads from its competitors.
This is the kind of long-term approach that income investors find appealing. Growth-oriented companies often bleed cash as they chase market share, but there are worse ideas than simply harvesting from an existing and loyal customer base to support generous dividend payments.
That’s what VZ has been doing, and what it will continue to do. And with a yield that is double or even triple some of the other stocks on this list, Verizon is definitely one of the best dividend stocks for beginners right now.
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Dividend Stock FAQs
Do all companies pay dividends?
Not all companies pay dividends. Some companies choose not to, while other companies cannot afford to.
As you can tell by this list, the best dividend stocks are normally slow-and-steady companies that have consistent operations. While it might be possible for a small software company or biotech firm to double its share price overnight, these companies rarely pay dividends because they don’t have much in the way of profits—and what they do have, they want to spend on other things, like research and development to continue growing.
How often do companies pay dividends?
The cycle of paying dividends is always different depending on the company. While it’s generally true that most U.S. corporations opt to pay their shareholders a dividend once per quarter, the dates aren’t fixed.
Specifically, one company might pay you on a January-April-July-October payment cycle while another opts for February-May-August-November.
Complicating things further, some companies pay dividends twice a year, some pay once a year, and some even pay “special” unscheduled dividends.
What should income investors look for in a dividend stock?
There are a host of things to consider when looking for the best dividend stocks.
First, and foremost, you should make sure you understand the underlying business and its strategy; just because a company pays a dividend doesn’t mean it can’t crash and burn.
If you generally like what you see, then you should consider the quality of the dividends including the history of payouts and the payout ratio as a portion of total earnings.
Then, you should consider the quantity of that dividend and the potential for future growth in payouts.