The best dividend stocks are not always the ones with the highest yields. After all, a company that pays a 10% dividend today might be doing so because it paid 5% a year ago and just saw its share price cut in half.
Instead of simply chasing yield, then, long-term investors should consider buying a stock based on its dividend growth potential. This will increase your personal yield over time even if the dividend yield for new money never changes much.
Consider the following math.
- ABC Corp. pays $1 annually in dividends and trades for $50 when you buy it. The yield at the time, then, is 2% — $1 in dividends divided by $50 as your cost per share.
- In five years, ABC Corp. pays $1.50 in annual dividends and trades for $75. The dividend yield to new money still is 2%, but your personal yield is 3% — $1.50 now in dividends divided by your personal cost basis of $50.
- In 10 years, ABC Corp. pays $2 in annual dividends and trades for $100. The yield to new money is still 2%, but your personal yield is 4%.
Get the idea?
Viewed this way, then, the best dividend stocks are the ones that have a strong record of dividend growth and the potential for continued dividend increases going forward.
Here are five stocks that fit that description: