How to Find the Best Dividend Stock for You

Find out which category of dividend-paying company fits best with your investing style.

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The best dividend stocks give investors two vital things that they want in an investment. Current income can be helpful both for those who need to live off their investment portfolios and for those who like to have cash available to make opportunistic new investments. Meanwhile, dividend stocks also have the potential to see their prices rise over time, adding to their total returns.

Not every dividend-paying stock has the same attributes, though. If you look at dividend stocks as if they're all the same, then you can get caught in some painful traps. Here, we'll look at some different categories of dividend stocks that many investors gravitate toward, along with some tips for how to get the most out of them while avoiding potential pitfalls.

1. Dividend growth giants

Some of the most popular dividend stocks have long streaks of raising their dividends each year. The longest streaks now exceed 60 straight years of higher dividend payments, and you can find a good number of stocks with half a century or more of annual dividend increases.

However, before you jump into a stock just because it has a long history of rising payouts, you should look at some other key aspects. For instance, some of those long-streaked dividend growth stocks actually have yields that are quite low, not only compared to other dividend stocks but also to the overall market. Some stocks with long dividend streaks make token increases each year that extend their track record but aren't really meaningful in terms of providing more income.

2. Unsustainably high yields

Many dividend stocks have extremely high yields, raising the question among investors whether the stock can keep up the pace of its large payments. High yields can be a sign that a dividend cut is imminent, but some high-yield dividend stocks are able to keep making their payments for quite a while.

One thing to look at is how a company's dividends compare either with its earnings or with its cash flow. In some industries, earnings can be misleading, because large non-cash charges for items like depreciation affect earnings on an accounting basis but don't actually require the company to divert money from dividend payments. However, if neither earnings nor cash flow supports dividend payments, then you'll often find that a company is taking on debt to afford to pay shareholders, and that's something that most companies can't do for very long.

3. Dividends that companies have to make

Some companies are required to make dividend payments to meet certain requirements. For instance, real estate investment trusts benefit from not having to pay corporate-level income taxes, but to qualify for that treatment, they have to pay out the vast majority of their income to their shareholders in the form of dividends.

Investment vehicles like these often sport much higher yields than ordinary dividend stocks, but that's in part because they pay a larger portion of their earnings out to shareholders to meet these requirements. It's important to compare apples to apples in assessing yields of dividend-paying investments like these, or else you might draw the wrong conclusions.

4. Dividends that represent return of capital

Finally, some companies pay out as dividend distributions money that's more accurately described as being a return of capital. For example, royalty trusts typically make payments based on the production from their assets over a given time period. Eventually, though, the assets held by the royalty trust will be depleted, with no further production. In these cases, investors have to expect that the value of their royalty trust shares will trend toward zero over the long run, and so some of what they're getting as periodic payments needs to compensate them for the steady loss in value of their shares.

Be smart about dividends

Finding income from your investments is tough right now, and dividend stocks can be exactly what you're looking for to get income while also retaining some growth potential. By being aware of different types of dividend stocks, you can make smarter choices about which companies to add to your investment portfolio.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on International Stock News

Confused African-American girls in casual clothing standing outdoors and comparing information on smartphones.
International Stock News

Better artificial intelligence (AI) stock for 2025: Nvidia vs. Microsoft

Nvidia has significantly outperformed Microsoft stock over the past couple of years.

Read more »

A young man clasps his hand to his head with his eyes closed and a pained expression on his face as he clasps a laptop computer in front of him, seemingly learning of bad news or a poor investment.
International Stock News

3 subtle investing mistakes I won't repeat in 2025 and beyond

You can avoid the mistakes I made...

Read more »

A bemused woman tries to choose between two slices of cake she holds on two plates.
International Stock News

What's the better long-term investment: The Nasdaq-100 or the top S&P 500 growth stocks?

Investing in top growth stocks can be a great way for investors to grow their portfolios in the long run.

Read more »

man looking happy and excited as he looks at his mobile phone
International Stock News

Jensen Huang just delivered incredible news for Nvidia stock investors

At the CES 2025 technology conference, CEO Jensen Huang highlighted a new multitrillion-dollar opportunity.

Read more »

Happy young couple doing road trip in tropical city.
International Stock News

Why electric vehicle stocks like Tesla just rallied

Wondering what caused Tesla and these other EV shares to pop?

Read more »

a woman with her hands over her face splits her fingers over one eye so she can peep through them.
International Stock News

Will Nvidia stock fall below $100 in 2025?

A worrisome precedent has been set by market leaders of game-changing technologies and innovations.

Read more »

An elephant standing on a chair looking down at a mouse
International Stock News

Should you buy shares in the largest company in the world?

Today, about half of the 20 biggest companies by market value are in the technology industry.

Read more »

a couple clink champagne glasses on board a private aircraft with gourmet food plates set in front of them. They are wearing designer clothes and looking wealthy.
International Stock News

Tesla stock vs Amazon: Billionaires are buying one and selling the other

Several Wall Street billionaires have been making some moves!

Read more »