Dividend investing can be a stable and effective way at compounding gains over the long term through a buy-and-hold strategy. Dividend stocks tend to be established and mature companies in sectors such as utilities, real estate, and consumer staples, meaning that they oftentimes lack the flashy appeal of trending stocks. Similarly, these companies may not sport outsized returns in recent history. Nonetheless, accumulating and reinvesting dividend payouts through companies offering high dividend yields is a popular strategy among leading investors including Warren Buffett.
Dividend yield is an important metric when evaluating stocks of companies that pay dividends. It is a measure of the amount of money a company pays out in dividends against the cost of buying a share of that company. Thus, the higher the dividend yield, at least in theory, the more appealing the stock may be for dividend investors. In actuality, however, companies can also end up with very high dividend yields as a result of a stock price plummeting, so it's important to keep multiple factors in mind when evaluating whether a firm is a suitable dividend stock.
VZ: High Yield and Frontier Deal Hype
Telecommunications stalwart Verizon Communications Inc. (NYSE: VZ) has a dividend yield of 6.19% and a 19-year history of increasing dividend payments. Its annualized dividend growth over the past three years has been just under 2%, so investors holding shares of Verizon may continue to see their regular dividends increase going forward.
Though Verizon's potential for growth in the wireless space is limited, it is making significant moves in an effort to better position itself to capitalize on AI trends and connected smart devices. The company's recent announcement of its $20-billion planned acquisition of Frontier Communications Parent Inc. (NASDAQ: FYBR), expected to close next year, is evidence of this.
Investors should beware that Verizon's dividend payout ratio is over 100%, meaning that it paid out more in dividends than it earned in the most recent period. Thus, in order to sustain dividend growth, the company will have to boost its net income as well.
PEP: Relatively Lower P/E Ratio and Strong Dividend Increase
PepsiCo Inc. (NASDAQ: PEP) shares have fluctuated widely in the last year and are currently down about 2% in that time. The company has wrestled with depressed consumer spending and balancing price increases against customer pushback on topics including shrinkflation.
PepsiCo's forward P/E ratio is 21.6. While this would not typically be considered evidence of an undervalued firm, it is notable in this case because this figure is well below the company's historical average P/E ratio, indicating that this may be an opportune time to enter a position in the stock.
From a dividend perspective, PepsiCo also offers both a relatively strong dividend yield of 3.10% as well as an impressive 7.1% annualized 3-year dividend increase. With a dividend payout ratio of just under 79%, the company may be paying out more in dividends than investors deem sustainable. Nonetheless, if interest rates come down consumer spending may receive a boost, and PepsiCo will be primed to capitalize.
ET: Earnings Growth Potential and Impressive Yield
Energy Transfer LP (NYSE: ET) is a U.S. midstream energy firm that has a hand in a variety of natural gas and crude oil operations, making it a good choice for investors looking for broad exposure to this industry. Its dividend yield is the highest of these three firms at over 8%, made all the more impressive by the fact that the company's stock has risen by over 17% in the last year as well.
Energy Transfer's annualized 3-year dividend growth of just under 5% is possible in part because of its earnings growth and potential. Its projected earnings growth is 12%. Like Verizon above, investors should be aware that Energy Transfer's dividend payout ratio is high, at over 117%. This may pose a greater concern if the company's earnings growth trajectory slows.
Finding a Popular Dividend Stock
Many successful dividend stocks are stable companies that do not make headlines as trendy investment targets. Still, even seasoned firms like Verizon can foster new investor interest upon a major acquisition announcement or other significant news. Keeping dividend yield in mind as one of many factors to consider when selecting stocks for investment can help investors to build a strong passive income stream from dividend payments.
