Optimizers know I love a good dividend-paying stock. That’s one of the reasons I prefer to invest in individual stocks over mutual funds and even index funds. I’ve been investing in dividend stocks since 2002 and didn’t even realize it at the time. I just thought Home Depot would be a great stock for the booming housing market. “Wait, you’re telling me they’ll pay me every quarter to hold their stock? God Bless America!” Over the years I’ve refined my investing approach. Investing in individual stocks doesn’t have to be so intimidating.
One of my favorite aspects of investing in individual dividend stocks is that you can set up your portfolio to pay you when you’d like to be paid (bi-weekly, monthly, etc.). You determine when you get paid as well as if you want high-yielders and slow growers or lower-yielders and faster growers. I explain the process of paying yourself bi-weekly in this article.
Researching the Best Dividend Stocks for 2018
You’ll need to figure out which dividend stocks are the best ones for your portfolio. This is where you might think the process can be a bit overwhelming. A lot of folks will give up at this point and simply invest in a dividend index fund like Vanguard’s Dividend Appreciation Index Fund. This is a great index fund if you prefer not to choose individual stocks. Nothing wrong with that. But for the few brave folks that are left, here are a few different places to look for good dividend stocks.
Dividend Aristocrats Index – This index is comprised of S&P 500 companies that have raised their dividends for a consecutive 25 years. You can download a Google Sheet of this list here. Here’s a snapshot of the list of Dividend Aristocrats:
Dividend Achievers Index – This index is comprised of S&P 500 companies that have raised their dividends for a consecutive 10 years. You can download a Google Sheet of this list here. Here’s a snapshot of the Dividend Achievers:
Dividend Payers for Less Than 10 Years – The Aristocrats and Achievers Indices are great places to look for dividend stocks to add to your portfolio; however, you might miss some dividend stocks that recently started paying dividends. And by recent I mean in the last 10 years. Stocks like Starbucks (SBUX) and Dunkin’ Brands (DNKN) are two great dividend stocks that fit into this bucket. They’ve been paying and growing their dividend payments to shareholders for less than 10 years. You can find some of the best dividend stocks for 2018 in this category.
Think about some brands that have come on the scene in the last 10 years and then check to see if they’re paying dividends. These companies are usually not on the Achievers list because they’ve just started paying dividends. And there’s nothing wrong with that. Companies that are growing fast and initiate a dividend are likely to grow that dividend rapidly. That’s the case with Starbucks. In 2013, Starbucks paid $630 million in dividends. Fast forward to 2017 and the dividends paid to shareholders were $1.5 billion.
Cutting the List Down to Size
The Dividend Achievers has over 250 stocks listed on it. How in the world are we going to figure out which stocks we should add to our portfolio? That’s where we get down to some good ole’ fashion number crunching. I use the dividend performance indicator to figure out candidates. We can use the spreadsheet I have above for the Dividend Aristocrats to see what the dividend performance indicator is. It has the dividend growth rate and dividend yield; that’s all we need to know figure it out. All I did was multiply the growth rate by the dividend yield, and – voilà! – we have the dividend performance indicator to figure out which stock scores high.
Sorting the Dividend Aristocrats by the dividend performance indicator from high to low looks like this:
When I look at this list, I have to say I like all of these stocks and even own some of them. Now Cardinal Health Inc (CAH) is high on the list with a DPI of 33. Check out their dividend growth rate: 13%! And they have a great starting yield at 2.5%. Now I don’t own Cardinal Health…yet, but they look like a great candidate to start. Why haven’t I purchased Cardinal Health yet? Well, I own McKesson stock (MCK) so they’re in a similar space. I may still add Cardinal to my portfolio. After all, I own both Starbucks and Dunkin’ Brands and they’re in the same space.
A Starbucks lover just threw their macchiato across the room, upset at the fact I just compared them to …Dunkin’ Donuts – the more blue-collar coffee chain.
You see my methodology for searching for the best dividend stock candidates? It’s not a simply a run of the numbers. I have to like the numbers, the company, and the stock has to fit in my portfolio. I’m really picky when it comes to stocks; I’m in no hurry to buy shares and I only need to make a few decisions each year.
1) Numbers – The numbers have to be good. That means I need stocks that yield something, preferably over 1% and not more than 6%. Too low and you’ll never get good dividend growth. Too high signals a danger sign that the company is underperforming and the dividend may be cut. What’s even more important than the dividend yield is the dividend growth rate. A company that grows the dividend rate fast can make up for a small initial dividend. I like growth rates greater than 10% for low yielders. I’m also ok with small growth rates as long as the dividend yield is already high, as is the case with AT&T (T).
2) Company – First and foremost I prefer companies that have a strong brand or decent moat. Starbucks isn’t going anywhere. They have a brand that is second to none. They have a wide moat because of the brand. Starbucks doesn’t really have to compete with other companies on price, so they can continue to raise prices and keep profit margins high. They’re also a big player in real estate. Starbucks can out pay their competition for any piece of property, whether it’s a lease or buy. They did this just down the street from me close to Towson University in Maryland. They purchased a corner lot just across from the campus for more than $2 million. Then they had to spend big money (my guess is another $2 million) to build a nice drive thru that everyone could wait in line for a triple espresso.
3) Portfolio – You also need to consider how the stock fits in to your overall portfolio. After all, you don’t want to invest in PNC Financial (PNC) if you already own Bank of America (BAC) and Wells Fargo (WFC). Or, maybe your strategy is to own a bunch of stocks in the same sector. Whatever works for you. I like to have 12 – 20 stocks at any given time so I don’t want more than 2 stocks in the same industry. An exception to this is if I have a small position (less than 3%) in each of the stocks. Having 9% of your portfolio in 3 different financial stocks is not the end of the world. It might actually work out.
My Dividend Portfolio
What better way to communicate the best dividend stocks for 2018 other than showing you my actual dividend stock holdings. These are my dividend stocks as of January 20, 2018 – I filtered out all the stocks that didn’t pay dividends (UA, CMG, etc.) These stocks may or may not make sense to buy. Remember: price is what you pay and value is what you get. You should only purchase stocks that represent a good value, not stocks that are overvalued but are good companies. An example of this is Target (TGT): this stock has run up quite a bit lately and I wouldn’t be a buyer of the stock in the high $70’s per share in 2018.
The stocks highlighted in cyan are new purchases as of January 2018. I think these stocks will be good candidates going forward for various reasons. They might not be the best dividend stocks for 2018 but my guess is they’ll do better than average going forward. I plan to hold these for the next decade unless the share price goes sky high for any of them.
There’s a point that I’ll sell a stock that I think is overvalued. There’s a little art and a little science to that process. I don’t just sell stocks because they go up. I sell because the stock is way overvalued and there are better opportunities in which to invest. I explore why I sold REITS and utilities in this article. I’ve since been more attracted to REITs recently, as shown by my recent re-purchase of Realty Income REIT (O).
The best dividend stocks for 2018 are ones that fit into your portfolio based on your needs. I recommend getting dividend stocks with high growth rates and not necessarily the highest dividend yield. The stock should have a strong brand / moat and be in a good financial position. Please let me know what dividend stocks you like in the comments below or send me an email.