How do you choose stocks that pay high dividends?


Quick Answer

Buying when stock prices are low; analyzing a company's history of dividend payments and yearly growth; and checking payout ratio are three strategies that help investors choose better dividend-paying stocks, according to Robert Laura for Forbes. While there is no 100 percent secure method for evaluating stocks, having a consistent process pays off.

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Full Answer

When stock prices are near their 52-week high, the yield for dividends is likely to be near its 52-week low, explains Laura. If one stock appears at a slight discount on the basis of financials and is offering a higher yield than another stock at the same price, choosing the one with the higher yield is often the better decision for those looking to take dividends from companies that are also likely to keep appreciating in value.

Lists are available for companies that have elevated dividends annually for as many as 50 consecutive years, notes Laura. Companies that regularly increase dividends provide the stockholder with a shield against inflation, although some do not elevate dividends enough to cover inflation, which generally runs between 3 and 5 percent. Choosing companies that elevate dividends when times are both flush and lean is important for those looking for consistency.

Payout ratios below 60 percent are ideal for conservative investors looking for reliable returns, reports Laura. As of 2015, Pepsi offers a 51 percent payout ratio, while Coca-Cola's is 57 percent. The ratio indicates the support that earnings provide for the dividends. The smaller the ratio, the higher the dividend's security.

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