There are several ways for investors to add stable investments that provide a stream of income to their portfolios. One of the most common ways to do so is by investing in dividend stocks.
In fact, there are some companies, referred to as Dividend Aristocrats, that have consistently been raising their dividends every year for 25 years or more.
Here’s a look at five Dividend Aristocrats with yields above 5 percent. If you are considering adding any new investments to your portfolio, you may want to consult with a financial advisor who can help you devise a plan based on your individual needs, time horizon and risk tolerance.
5 Dividend Aristocrats with yields above 5%
| Company | Dividend yield |
|---|---|
| Franklin Resources Group (BEN) | 6.89 percent |
| Realty Income Corp. (O) | 5.97 percent |
| Amcor Plc (AMCR) | 5.65 percent |
| T. Rowe Price Group Inc. (TROW) | 5.63 percent |
| Stanley Black & Decker Inc. (SWK) | 5.11 percent |
What are Dividend Aristocrats?
A Dividend Aristocrat is a stock with a long track record of paying investors dividends. These are typically large, resilient companies that have stable, income-generating businesses. This means they aren’t necessarily the fastest-growing companies, but they typically have solid fundamentals.
To qualify as a Dividend Aristocrat, a company must meet these criteria:
- Increase its dividend payout every year for at least 25 years;
- Be a member of the S&P 500;
- Have a market cap of at least $3 billion;
- And meet the liquidity requirement of $5 million in average daily trading volume.
How to invest in Dividend Aristocrats
If you’re looking to cash in on the high dividends these stocks pay, you have a couple of options.
Buy individual Dividend Aristocrat stocks
If you’re choosing this route, you will have to put in some research to figure out which individual stocks fit into your long-term financial goals. A financial advisor can also help you pick investments that align with your overall financial plan.
Buy an exchange-traded fund (ETF)
Probably the easiest and most accessible way to invest in Dividend Aristocrats is to buy shares of an ETF. In fact, dividend stock ETFs are very popular, and you can even buy a Dividend Aristocrats ETF specifically. One option is the S&P 500 Dividend Aristocrats ETF (NOBL).
ETFs are an affordable way to diversify your portfolio because the expense ratios tend to be low. Also, these funds expose you to a basket of different stocks at one time, diversifying your holdings.
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The danger of chasing high yields
For all the benefits that come with generating passive income through stocks that pay dividends, there are a few risks to keep in mind when investing in high-dividend stocks.
- Competitive weakness. Some companies pay high dividends while neglecting to reinvest that money into their business so that the company can grow. This can potentially weaken their market position over time and create a decline in profit.
- Taxes. It’s important to understand that any dividends you receive are taxable as income (unless they’re in a 401(k) or other tax-advantaged account). The dividends are also taxable if you reinvest them.
- Warning signs. Sometimes, a company’s dividend yield is high because it has recently experienced a major drop in its stock price, sending the yield up. Make sure to evaluate the financial health of the company and metrics like its payout ratio, which will tell you what percent of the company’s profits are paid out as dividends. If the company has a large payout ratio, that means it may have to dip back into that during times of economic distress, taking away from the dividend you’ll receive.
Bottom line
Investing in Dividend Aristocrats is just one way to generate passive income. There are a few ways to go about investing in stocks, including buying them individually or purchasing shares of an ETF that includes Dividend Aristocrats.
Whichever route you choose to go, remember to take the time to consider your risk tolerance, time horizon and how Dividend Aristocrats fit into your long-term investing strategy. A financial advisor can help you navigate the answers to these questions.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
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