Price appreciation (buy low, sell high) is not the only way to earn income in the equity markets. Dividend-yielding stocks in 2020 provide a potential stream of passive income for investors.
A stock that yields a dividend gives regular payouts to shareholders in proportion to how many shares they hold. Why would a company do this?
First, it provides an obvious incentive for people to hold shares beyond the potential for capital gains. Second, most companies get tax write-offs for their dividend payouts. Dividends are most often paid out on a quarterly basis, although different timeframes exist too.
Why do investors want to hold dividend-yielding stocks?
Here’s a concise summary of the advantages of dividends provided by The Motley Fool:
Dividends have the advantage of putting money directly back into shareholders’ hands. This option gives investors the most control over their money — they can choose to use the dividends to cover living expenses, reinvest them in more shares of the same stock, or use them to invest elsewhere.
Dividend stocks are known as “hybrid investments” because they offer profit potential in two different ways: 1) dividend payments and 2) price appreciation (capital gains).
Dividend Reinvestment Program (DRIP)
It’s been said that compound interest is the most powerful force in the universe. With DRIP, you can harness that power.
DRIP is just what it sounds like – reinvesting your dividends into the same security. What’s the benefit of doing this?
By reinvesting dividends, you increase the number of shares you hold (without investing additional outside capital), which means you will receive more dividends on the next payout.
Note that if you already have a sizeable portfolio and are simply looking for income, DRIP might defeat the purpose of receiving dividends. On the other hand, if you’re a younger investor seeking to grow a portfolio over the long-term, DRIP might be an excellent option to consider if you want to safely increase your holdings of specific securities.
3 Safe Dividend-Yielding Stocks for 2020
There are a lot of variables to consider when it comes to dividends. There’s more to it than just looking at the yield. Overall, it’s not unlike considering other investments, but with a few added caveats. You want companies with strong fundamentals, good management, and a proven track record of increasing their dividend payouts.
Here are three good options for beginners considering dividend-yielding stocks in 2020.
Macy’s (M) is one of the biggest names in American retail. They sell designer clothes, fine jewelry, home appliances, and more.
Like all retail, Macy’s has an uncertain future. Even so, holding the stock isn’t a bad idea for two reasons: 1) the dividend, and 2) the company has significant real estate holdings throughout the US, Puerto Rico, and Guam.
In the event that Macy’s closes its doors for good, the sale of this real estate would provide more than enough financing to pay out shareholders, perhaps with a generous bonus. Bottom line, even if the company goes bankrupt, you won’t see shares go to zero without getting anything in return.
M had been hovering around the $15 mark, a multi-year low, for several months. The recent December breakout to $17 suggests that a period of consolidation could be giving way to a new bullish trend. A sustained rally above the support level of $17.85 is needed to confirm this, though.
Macy’s (M) has an attractive dividend yield of 9%.
AT&T (T) is an internet service provider (ISP) company that needs no introduction.
T has been criticized for having a massive debt burden, and rightfully so. But with interest rates so low and trending ever-lower, this shouldn’t be a problem for the time being.
The term “dividend aristocrats” is used to refer to S&P 500 stocks that have increased their dividend every year for at least 25 years in a row. T falls into this category.
T continues to add mobile users despite competition from the likes of Verizon and T-Mobile. An AT&T streaming service is in the works, and while it’s not likely to do very well in the face of services like Netflix, Hulu, Apple TV, and Disney +, you never know.
Amidst a strong bull run, the stock is approaching 1-year highs just above $39.
T has a great dividend yield of 5.4%.
Real estate investment trusts (REITs) should be a part of any dividend stock portfolio. REITs allow investors to participate in the largest asset market in the world – real estate – without the risks and upkeep costs associated with owning physical property.
In addition, REITs tend to have a higher than average dividend yield.
There are many different types of REITs, including commercial, residential, retail, and data centers.
One REIT that many analysts rate as a strong BUY right now is a data center REIT called Cyrus One (CONE). The following description of CONE comes from reit.com:
“CyrusOne is a high-growth REIT specializing in highly reliable enterprise-class, carrier-neutral data center properties. The company provides mission-critical data center facilities that protect and ensure the continued operation of IT infrastructure for approximately 1,000 customers, including more than 210 of the Fortune 1000 or equivalent-sized companies.”
CONE recently suffered a ransomware cyberattack, although they managed to restore data from backup servers to mitigate the impact and avoid paying the ransom. The stock has seen a sharp pullback from its all-time high of $79.24 reached in October 2019.
Currently trading around $69.50, technical indicators suggest the bears may be losing control. But personally, I’d wait to see how investors respond to the December cyber attack news in Q1 2020 before looking for an entry point.
CONE has a dividend yield of 3.12%.
Dividend-Yielding Stocks 2020
The topic of dividend-yielding stocks is in-depth. Many aspects of it go far beyond the scope of this article.
The distinction between ordinary and qualified dividends, for example, is an important one that isn’t covered here. We also didn’t go into detail about the payout ratio, a crucial metric to consider when analyzing dividends. Interested investors will do well to conduct further research on their own.
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Disclosure: The author, Brian Nibley, is long M and T. This article shall not be taken as advice to buy, sell, or trade any security.