What to look for in dividend stocks

Here are five top dividend stocks that investors may consider buying, all of which are listed as Dividend Aristocrats in the S&P 500 index and have paid and raised their base dividend for at least 25 consecutive years:

1. Lowe’s (LOW -0.98%): Despite being a home improvement giant that may not seem like an exciting stock, Lowe’s has consistently raised its dividend every year since going public in 1961, with a payout increase of 556% over the past decade. Furthermore, the current housing downturn is unlikely to affect the company’s profits as people tend to invest in their homes when housing supply is tight and it’s harder to buy.
2. Walgreens Boots Alliance (WBA -0.52%): As one of the largest retail pharmacy operators globally, Walgreens has made significant cost-cutting efforts and has been transitioning to become a more integrated healthcare company, which has already shown a positive impact on profitability. With a dividend yield of over 4.5% and 47 consecutive years of annual payout growth, Walgreens stock is appealing to dividend and value investors.
3. Realty Income (O -0.22%): Realty Income offers investors an easy way to invest in high-quality real estate for income and growth. The company owns a diverse range of largely e-commerce-resistant properties, earning steady cash flows from tenants on long-term leases. Realty Income is also a Dividend Aristocrat, with 27 consecutive years of dividend increases and 53 straight years of paying a dividend every month since going public in 1994.
4. Johnson & Johnson (JNJ 0.05%): Johnson & Johnson owns a portfolio of healthcare brands and products, including consumer brands, pharmaceuticals, and medical devices. This diversity has allowed the company to increase its dividend for 60 years in a row. In late 2021, the company announced plans to split its consumer products business into a separate company to better focus its resources, with the split set to occur in 2023.
5. Target (TGT -0.86%): Despite a challenging year in 2022, Target remains a solidly profitable retailer, with high gross and operating margins and a focus on expanding its e-commerce and in-store offerings. The company has a dividend growth of 50 years and counting, and its shares are currently trading at a discount to its all-time highs, making it an attractive option for dividend investors.

Four additional top dividend stocks to consider

While the Dividend Aristocrats list is a good starting point, there are many excellent companies that have not been paying dividends for long enough to be included. These companies can still make excellent long-term dividend investments, particularly those with strong brands, loyal customer bases, and favorable demographic trends.

Here are four more dividend-paying stocks to consider, each with unique characteristics that make them attractive:

Brookfield Infrastructure Corp. (BIPC 0.07%) (BIP -1.53%): Sometimes the best investments are the ones that are hiding in plain sight. Brookfield Infrastructure, a global owner of water, energy, utility, transportation, and communications infrastructure, generates steady cash flows that are resistant to recession and inflation. With a dividend yield of around 3.5% and a goal to raise the payout 5% to 9% annually, Brookfield Infrastructure is a hidden dividend gem that has delivered almost 900% in total returns since its IPO in 2008.

Microsoft (MSFT 1.97%): As one of the largest companies in the world, Microsoft’s focus on recurring revenue sources makes it an attractive option for dividend investors. With a solid balance sheet, low payout ratio, and a 12-year streak of dividend increases, Microsoft has the potential to become a Dividend Aristocrat. Although its yield is relatively low at 1.1%, Microsoft has a strong long-term track record of market-beating total returns.

American Express (AXP 0.01%): Financial services, such as consumer and business lending, are also a good place to find top dividend stocks, and American Express is one of the best. While it is not a Dividend Aristocrat, American Express has maintained or raised its dividend for decades due to its high-quality lending standards and focus on higher-income consumers. This makes it an appealing choice for investors who want to own a top financial services company but are concerned about economic conditions. American Express is a great stock to buy during market downturns and hold for the bull market recovery.

Clearway Energy (NYSE:CWEN.A): While renewable energy is typically considered a growth investment, it also presents an excellent opportunity for dividends. Clearway Energy, which owns and operates utility-scale wind and solar assets, invests in and acquires renewable facilities that sell power on long-term contracts to utility companies. With a dividend yield above 4.5% and an 84% increase in payout since 2019, Clearway Energy is a low-volatility option for investors seeking to profit from renewables.

If you are new to dividend investing, it is advisable to familiarize yourself with dividend stocks and understand why they can be excellent investment opportunities. Once you have a strong understanding of how dividends work, a few key concepts can help you identify excellent dividend stocks for your portfolio.

Payout ratio: A stock’s payout ratio is the amount of money the company pays per share in dividends divided by its earnings per share. In other words, this tells you the percentage of earnings that a stock pays to shareholders. A reasonably low payout ratio (70% or less) is a positive indication that the dividend is sustainable.

History of dividend increases: It is a very positive sign when a company raises its dividend year after year, particularly when it can continue to do so during difficult economic times such as recessions or the COVID-19 pandemic.

Steady revenue and earnings growth: Prioritize stability in the companies you consider when searching for the best dividend stocks to own for the long term. Erratic revenue (up one year, down the next) and fluctuating earnings can be warning signs of trouble.

Durable competitive advantages: This is perhaps the most important feature. A durable competitive advantage can come in several forms, including a proprietary technology, high barriers to entry, high customer switching costs, or a powerful brand name.

High yield: This is last on the list for a reason. A high yield is obviously preferable to a lower one, but only if the other four criteria are met first. A high dividend is only as strong as the business that supports it, so compare dividend yields only after you ensure the business is healthy and the payout is stable.

Dividend stocks are long-term investments

Even the most stable dividend stocks can experience significant volatility over short periods. There are too many market forces that can move them up or down over days or weeks, many of which have nothing to do with the underlying business itself.

So while the companies listed above should make great long-term dividend investments, do not worry too much about day-to-day price movements. Instead, focus on finding companies with excellent businesses, stable income streams, and strong dividend track records. The long term will take care of itself.