The top dividend stocks for September include oil and gas shipping companies Dorian LPG (LPG) and Frontline PLC (FRO), oil exploration firm Berry Corp. (BRY), real estate finance firm Ready Capital Corp. (RC), and food producer Cal-Maine Foods (CALM).
- Dividend stocks are those that pay shareholders a portion of earnings on a regular basis.
- Most dividends are paid out quarterly, although some are paid monthly, biannually, or annually.
- Dividend yield is a key measure for dividend stocks and is calculated by dividing the annual dividend amount by the company’s share price.
- Because it is calculated using the share price, dividend yield fluctuates as the stock rises and falls.
- Dividend yield is one of several important factors when choosing a dividend stock to invest in.
Most companies that pay dividends have stable earnings and aren’t in need of capital for growth. It’s a good idea to look for companies that have a strong history of making dividend payouts in the form of cash or stock to shareholders over a period of many quarters or years.
The dividend payout ratio (DPR) is a measurement of total dividends divided by a company’s net income. This metric shows the portion of a company’s net income that is paid out to shareholders as well as the portion that remains available to the company to reinvest for growth. In this way, DPR is a measure of the sustainability of a company’s dividend payments.
If the DPR ratio exceeds 100%, meaning that it is paying out more in dividends than it is earning in income, or if it’s negative, meaning that the company has posted a net loss, this is generally a sign of trouble. The company may be borrowing money to continue its dividend payments or may be losing money. In either case, it might be increasingly likely that the company will discontinue dividend payments in the future.
A benefit of dividend stocks is regular dividend payments. However, even a long history of previous dividends is no guarantee of future payments if the company falls on hard times.
The S&P 500 Dividend Aristocrats Index (SPXDA) is a good, broad benchmark for dividend stocks and has risen 7.7% in the last year, while the highest-ranked large-capitalization stocks tracked by Russell 1000 Index (RUI) are up 12.9%.
We examine the five top dividend stocks from the Russell 3000 Index by forward dividend yield below. Companies with DPRs that are negative or above 100% have been excluded. Statistics below are as of Aug. 16, while all other figures are as of Aug. 30. All are sourced from YCharts.
- Forward Dividend Yield: 15.6%
- Payout Ratio: 80.9%
- Price: $25.61
- Market Cap: $1.0 billion
- 1-Year Total Return: 99.4%
Dorian is a liquefied petroleum gas shipping company operating a fleet of very large gas carriers (VLGCs). In the company’s most recent quarter it reported net income of $51.7 million on revenues of $112 million and declared an irregular dividend totaling just over $40 million, payable on Sept. 6.
- Forward Dividend Yield: 15.3%
- Payout Ratio: 49.7%
- Price: $8.06
- Market Cap: $609.8 million
- 1-Year Total Return: 2.8%
Berry is an upstream energy firm that explores oil properties in the U.S. For the second quarter, the company reported net income of $26 million, translating to 33 cents per diluted share. It paid out total dividends of 14 cents a share during that period.
- Forward Dividend Yield: 15.2%
- Payout Ratio: 63.1%
- Price: $10.67
- Market Cap: $1.8 billion
- 1-Year Total Return: -11.2%
Ready Capital is a real estate finance firm originating, acquiring, financing, and servicing small- and medium-sized balance commercial loans. The company reported earnings per common share of $1.87 for the latest quarter and paid out dividends totaling 40 cents a share.
- Forward Dividend Yield: 11.1%
- Payout Ratio: 33.3%
- Price: $46.57
- Market Cap: $2.3 billion
- 1-Year Total Return: -7.0%
Cal-Maine is the largest producer and distributor of fresh shell eggs in the U.S. For the last quarter, the company posted net income of $111 million, or $2.28 per basic share. It announced a dividend payment of 76 cents per share, or just over $37 million in total.
- Forward Dividend Yield: 10.0%
- Payout Ratio: 42.2%
- Price: $17.71
- Market Cap: $3.9 billion
- 1-Year Total Return: 75.5%
Frontline is one of the world’s largest oil tanker shipping companies. For the second quarter, it reported $230.7 million in profit, or $1.04 a share. Frontline also paid out 80 cents per share in dividends for the quarter.
A high dividend yield doesn’t necessarily mean a company is doing well financially. It’s important to also consider overall financial well-being and growth potential before making an investment.
Important Ratios Used To Analyze Dividend Stocks
Dividend payout ratio: DPR is an indication of the percentage of company earnings paid out to shareholders, calculated by dividing total annual dividends by net income.
Company A will have a DPR of 30% if it reports a net income of $50 million and pays $15 million in yearly dividends ($15 million / $50 million = 30%). Thus, the company paid out 30% of its annual earnings to its shareholders in the form of dividends. Although investors have a variety of viewpoints on DPR, a common school of thought is that a DPR of under 50% is stable, with the potential for long-term earnings growth and continued dividend payments.
Dividend yield: The dividend yield is a measurement of the value of dividends paid out over a year as compared with per-share market value for a company. The dividend yield is calculated by dividing the yearly dividend per share total by the current stock price.
Company A above may issue an annual dividend of $10. If you calculate the dividend yield when the current share price for that company is $100, it will mean a dividend yield of 10% ($10 / $100 = 10%). But if the stock price rises to $110 tomorrow, the dividend yield will then be 9.1% ($10 / $110 = 9.1%). Dividend yield is thus susceptible to change as the stock price shifts.
Even though a higher dividend yield can be attractive for investors, it isn’t always necessarily a good thing. The dividend yield could be high because the stock price has been falling for example. Generally, it is wise to look at other factors in conjunction with dividend yield in deciding whether to invest.
Dividend coverage ratio: The dividend coverage ratio assesses the number of times a company can afford to pay dividends to shareholders. This ratio is calculated by dividing annual earnings per share (EPS) by annual dividend per share.
Say that Company A reported $50 million in net income and has an annual dividend payout of $10 million in total. The dividend coverage ratio would be five times ($50 million / $10 million). Often, a higher dividend coverage ratio is seen as favorable when selecting dividend-paying stocks.
Benefits of Dividend Stocks
Passive income: Companies paying dividends usually offer them once a quarter. This generally means a reliable—if small, depending on the size of your investment—source of passive income. Investors often take dividend income and reinvest it in the same or another company. This income can also help to make up for a declining share price.
Dividend reinvestment: As mentioned, investors often use a dividend reinvestment plan (DRIP) to take the dividend income they receive and immediately invest it in more shares of the company. This is a convenient way to capitalize on compounding returns.
Which Companies Have the Longest History of Dividend Payments?
The companies paying dividends for the longest period of time have paid them continuously over at least 100 years. These include General Mills, Chubb, Proctor & Gamble, Consolidated Edison, Eli Lilly, Coca-Cola, and ExxonMobil.
Which Variables Should You Consider When Selecting a Dividend Stock?
Dividend yield, calculated by dividing the annual dividend by the current share price, is a useful measure to consider. Similarly, dividend payout ratio (DPR), the percentage of earnings paid out as dividends, helps investors to determine how sustainable a dividend program may be. But there are many other factors to consider, including an increase in the size of dividend payments, consistency of dividend payments, and more.
What’s the Difference Between Payout Ratio and Dividend Yield?
Dividend payout ratio is determined by dividing dividend payments by earnings, while dividend yield is calculated by dividing dividend payments by stock price. The payout ratio shows investors how much of its earnings a company pays out versus how much it keeps for itself to grow and maintain its business. The higher the payout ratio, the more likely investors will be skeptical of the company’s ability to maintain growth and its dividend program.
The Bottom Line
Dividend yield measures the dividend payments a company makes against the price of its stock. High dividend yields are sometimes seen as a good indicator of a strong dividend stock for investment, but this is one of many different factors to consider. At the same time, a dividend yield that is too high can sometimes mean the company is struggling.
Investors should be sure to look for companies with healthy financial fundamentals in addition to competitive dividend yields and payout ratios to maximize their investment potential.
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As of the date this article was written, the author does not own any of the above stocks.