Whether you're looking for income for today or building a growth portfolio for future wealth, dividend stocks have a place in every investor's toolbox. Moreover, there's plenty of evidence that the best dividend stocks aren't necessarily the ones with the biggest yields; they're the strongest companies that can support and grow their payouts over time.
In fact, high-yielding stocks can sometimes turn out to be dividend traps, leaving investors with a smaller payout than they were expecting and often with a capital loss when the payout gets cut and investors sell out. Instead of starting with yield when deciding what stock to pick, investors can often do better by looking for financial strength and dominant market share.
While this isn't a foolproof method -- remember, investing is about probabilities and using diversity to hedge your risks -- it can help avoid unforced errors.
With that in mind, let's approach the idea of picking dividend stocks from a different angle: the biggest companies by market capitalization that pay a dividend.
The 11 largest dividend stocks trading on U.S. stock markets
By market cap -- the total market value of a company's outstanding shares of stock -- these are the 11 biggest dividend stocks on the S&P 500 index:
Year Over Year
|JPMorgan Chase (NYSE:JPM)||$347.9||3.1%||12.5%|
|Johnson & Johnson (NYSE:JNJ)||$342.2||2.81%||5.6%|
|Procter & Gamble (NYSE:PG)||$285.6||2.56%||4.0%|
|Bank of America (NYSE:BAC)||$258.9||2.15%||20%|
|Walt Disney (NYSE:DIS)||$247.6||1.28%||4.8%|
With a combined market value of more than $4.5 trillion, these 11 companies make for a surprisingly diversified list that includes technology, energy, banking, telecommunications, healthcare, retail, and entertainment industry giants.
Moreover, potential investors of all stripes can find something from this list that fits within their portfolio goals. Looking for high yields to generate income today or in the near future? Check. More interested in gaining exposure to a particular industry? You bet. Focused on long-term growth or a company with strong competitive advantages trading for fair value? You can find those, too.
Before we take a closer look at these 11 companies, let's talk a little about what dividends are and what investors should look for when picking dividend stocks to buy.
Different kinds of dividends (and why it matters)
A dividend is a payment by a company to its shareholders. Typically made in cash and paid quarterly or annually, dividends are also sometimes paid out in company stock. However, beyond this general description, there are actually a lot of different kinds of payments that are called dividends but fall under different financial descriptions.
To be clear, this isn't a distinction without a difference. How a dividend is classified very much affects something relevant: how those dividends are taxed. Here are some of the different kinds of dividend classifications investors should understand.
The most common type, qualified dividends, must meet three main criteria:
- The dividend was paid by either a U.S. corporation or qualified foreign company (either incorporated in a U.S. possession, located in a country with an income tax treaty with the U.S., or listed on a U.S. exchange).
- It was an ordinary dividend, not a capital gain distribution, a dividend from a tax-exempt organization, or a payment in lieu of dividends.
- You, the shareholder, must own the shares for at least 60 days during a 121-day period, starting 60 days prior to a company's ex-dividend date, which is the last date you can own shares and be entitled to a particular dividend.
Qualified dividends are not only the most common, but they're also preferred by investors because they get very favorable tax treatment. The table below shows the tax rate on qualified dividends, as compared to each of the marginal income tax brackets:
Ordinary Income Tax Rate
Tax Rate on Qualified Dividends
As you can see, no matter which tax bracket you fall into, income earned as qualified dividends is taxed at a much lower rate than your regular income. This is why qualified dividends are considered a favorite source of income for investors.
In general, it's a dividend paid by a company that doesn't meet one of the criteria above, or you haven't held the stock long enough for the dividend you received to qualify. The biggest difference is how you'll be taxed. If you earn nonqualified dividend income, it will be subject to income tax at your ordinary income marginal tax rate, which could be as high as 39.6% depending on which tax bracket you fall into.
Return of capital
This is a unique type of dividend in that it's essentially a company returning to shareholders a portion of the capital they invested. The nice thing about return of capital is that, in general, these funds are not subject to taxes. That's because the company is returning money to you.
But don't confuse "not taxed" with "no tax consequences." That's because returning capital to shareholders will lower the cost basis on your investment. Let's use a real-world example of how this impacts investors. Pattern Energy Group has classified its dividend as a return of capital, paying approximately $7.77 per share in return-of-capital dividends since 2014. If you bought shares of the company on Jan. 2, 2014, for $30.31 per share (closing price that day), the $7.77 you've been paid back in return of capital since then would mean your current tax basis -- what the IRS would consider your stock purchase price for determining taxable gains or losses -- would be $22.54 per share.
In other words, the return of capital is tax free today, but it comes with future tax consequences if and when you sell that stock. What happens if you own a stock so long your cost basis reaches $0? Dividends earned beyond that are then taxed as capital gains, and all of your proceeds from selling the stock are considered taxable gains.
Sometimes called a "scrip" dividend, companies sometimes pay shareholders in company stock, not cash. Why would a company pay out in stock? In short: cash savings. If the company is issuing new shares to pay the stock dividend, it doesn't have to pay out any cash. The downside for investors is that it washes out much of the value of the payout by diluting your investment while also adding the additional step of having to sell those shares if you're looking for income now.
Much like a return of capital, the implications -- beyond the obvious one of not getting cash -- are mainly how it affects your tax basis. In short, your tax basis stays the same but is divided over the new number of shares you own.
For example, let's say you spent $2,000 to buy 100 shares of a company; that works out to a $20-per-share tax basis. If the company paid a scrip dividend that worked out to 5 new shares of stock, your tax basis would remain $2,000 but be divided across 105 shares. That would lower your tax basis to about $19.05 per share, which would affect either taxable gains if you sold for a profit or taxable loss if the sale price is below that $19.05 per share price.
Lastly, a stock dividend is not the same as a DRIP, or dividend reinvestment plan. A stock dividend is a company issuing shares directly to you; a DRIP is a plan to take cash dividends and have them automatically be reinvested in company stock. With a DRIP plan, you are still subject to the same tax consequences of whatever type of dividend a company pays, even if you never actually touch the money.
(Note: The tax language above is based on holdings in a taxable account. Dividends earned in retirement accounts generally qualify for tax benefits not discussed in this article. For more, see our articles on the Roth IRA, the traditional IRA, and the 401(k).)
What to look for in dividend stocks
Over the past decade, many investors looking for yield -- the percentage of your investment an investment pays each year -- have flooded into the stock market. One of the biggest reasons has been the ultra-low interest rate environment we have experienced since the Great Recession, with bond yields spending most of the past decade at historically low levels:
This has led many investors to take on more risk to get a higher yield from companies that, in a lot of cases, aren't able to maintain the yields they are producing.
With this in mind, a couple of things can help you avoid unnecessary losses.
The dividend payout ratio is, in short, the percentage of a company's earnings it used to pay dividends. This is an important metric to use when digging into dividend stocks you're considering buying. It's often considered with its cash-based cousin, the cash payout ratio, which measures the percentage of a company's cash flows it used to pay dividends.
In general -- and remember that this is a metric that's best used over an extended period, not just a single quarter -- the lower the payout ratio, the more secure a dividend should be. Moreover, a low payout ratio also indicates if a company has the capacity to increase its dividend, though only management can indicate whether it has a plan to do so.
In many cases, one of the best ways to determine how likely a company is to keep paying a dividend is by examining its track record. In general, many of the companies on this list have incredible track records, including long records of paying dividends and, in a few cases, multiple decades of raising the payout every single year.
To paraphrase legendary investor Peter Lynch, you're often better off owning a decent business in a great industry than a great business in a tough industry. An excellent example is ExxonMobil, widely considered the best-run oil company in the world.
Even this stalwart has struggled over the past five years, seeing its stock price fall about one-third since 2014, as crude oil and natural gas prices have fallen by nearly half. Even after factoring in its sizable dividend and regular increases, investors in the best oil company on earth lost almost 17% of their value over this five-year period. Moreover, the growth of renewables like wind and solar could continue to erode the prospects for oil and gas going forward. This is the epitome of Lynch's best company/tough industry warning.
As a comparison, we can look at Walmart. Over the same period, Walmart's stock price rose 45%, and its dividend-adjusted total return is 68% due to strong consumer spending and the company's successful pivot to leveraging e-commerce.
More detail on the 11 biggest dividend stocks
Now that we have a better sense for how dividends work, let's take a look at each of our 11 companies and their dividend details.
As of this writing, Microsoft, with its roughly $1 trillion market cap, is the biggest and most valuable company on this list. It also pays one of the lowest dividend yields, less than 1.5%.
But it's also one of the strongest dividend stocks on the list because of Microsoft's ability to continue paying it. In fiscal year 2019 (Microsoft's business year ends in June), the company's dividend payout ratio was 35.2%. That means the company retained nearly two-thirds of its earnings even after paying the dividend, money it can reinvest in the business in other ways.
And the company is using its strong earnings to invest in its growth as one of the world's biggest cloud infrastructure providers. On Microsoft's fourth-quarter 2019 earnings call, CEO Satya Nadella said its Commercial Cloud business had become the largest in the world, generating nearly $40 billion in revenue for the company at an incredible 63% gross margin. Moreover, the company has also shifted much of its legacy software business away from selling boxed software that customers must then upgrade every few years to a subscription-based model in which they can always have the most up-to-date version.
Moreover, the growth of the cloud seems likely to drive Microsoft's results even higher in the years ahead. More and more businesses -- and consumers -- are taking advantage of the power of cloud-based tools, and under Nadella's leadership, Microsoft has transformed into one of the front-runners in this space.
That growth should help compensate for Microsoft's lower yield, since it should fuel continued payout growth. Over the past decade, Microsoft has increased the payout nine times, up 254% in all. That includes a nearly 10% bump in 2018.
Another tech behemoth with a lower yield -- about 1.5% at this writing -- Apple still counts on the iPhone for most of its revenue and profits. However, the smartphone business has gotten quite mature, and Apple, like Microsoft and most other large tech companies, has prioritized its services offerings in recent years. That change in focus has paid off, with increased services sales and profits helping to offset shrinking iPhone revenues.
Also like Microsoft, Apple sports an incredibly low payout ratio of only 23% in its most recent fiscal year. Over the past five years, Apple's payout ratio has been consistently below 30%, an impressive feat considering the payout has been bumped up every year and is 64% higher today.
Sure, Apple's iPhone business is no longer likely to deliver the sort of growth investors have enjoyed since its debut more than a decade ago. Yet it remains incredibly popular with consumers and profitable for the company, while Apple's services business, along with accessories such as its AirPods, are helping pick up the slack.
With some of the strongest cash flows in the world and a dividend that management considers a priority to support and regularly increase, Apple has transitioned from a high-growth stock to dividend growth.
One of the most recognizable brands in the world, Visa's global electronic payments network facilitates millions of financial transactions every single day. Moreover, it has a powerful network effect -- more Visa cardholders attract more merchants; more merchants accepting Visa attract more cardholders -- that has steadily resulted in years and years of growth.
That's been fantastic for investors who've held onto the stock over the past decade, enjoying more than 900% in gains. Investors have also enjoyed Visa's incredible dividend growth. Since initiating a dividend in 2009, Visa has increased the payout 852%.
Moreover, it's poised to remain a winning investment. Electronic payments may seem like a mature market, and that's true to some extent in developed economies, but on a global basis, the vast majority of transactions are still cash based. That's true between consumers and merchants but also of business-to-business transactions; even in the West, cash remains the primary payment method for B2B transactions. Moreover, transactions across international borders are a growing area of need in which Visa is making investments to be a leader.
So even with an incredible track record of growth already behind it, Visa remains a growth stock that investors should consider owning. Its dividend yield (below 1% at this writing) pales in comparison to that of many other companies, but Visa's management is -- and should be -- prioritizing the growth of its platform and the payment processing/transaction services it offers. That's a far smarter use of the company's capital right now than a bigger dividend today.
After all, today's investments in growth are what should allow the company to continue increasing the dividend by double-digit rates. And over the next decade-plus, that will really pay off for long-term investors.
A decade removed from the financial crisis that kicked off the worst global recession in 80 years, JPMorgan Chase not only managed to come out relatively unscathed (at least compared to many of its peers) but emerged as the biggest bank in the U.S., with more than $2.7 trillion in assets through the second quarter of 2019.
It's also consistently been the most profitable U.S. megabank. Between 2010 and 2018, there were only two years -- 2014 and 2015 -- in which it didn't generate the most earnings of any American bank:
Moreover, it has steadily grown the amount of its earnings that get returned to shareholders, increasing the quarterly dividend from a nickel per share in 2009 to $0.90 per share after raising the payout 12.5% starting with its third-quarter 2019 dividend.
As a more mature business, JPMorgan also pays an above-average yield of just over 3% at this writing. Yet even though the yield is relatively high, it's still well within the bank's ability to maintain. The company's payout ratio was just over 33% in the trailing 12 months and has only been above 36% once since 2010.
Johnson & Johnson
The largest healthcare company in the world, Johnson & Johnson is a leader in consumer health products, medical devices, and pharmaceutical drug development. Combined, this makes J&J, as the company is commonly called, one of the most compelling dividend stocks out there for several important reasons.
First, J&J's business is incredibly resistant to economic ups and downs. The health-related products it sells remain in demand in a recession, as consumers are more likely to cut back on other expenditures before deferring medical expenses. Want a little proof? The year 2018 marked the 35th consecutive year the company increased its adjusted operating income. That puts it solidly on the Dividend Aristocrats list of S&P 500 companies that have increased their base dividend payout every year for at least 25 consecutive years. And J&J has regularly rewarded investors with a portion of that growth, increasing the quarterly dividend an incredible 5,670% over that period. Shareholders have enjoyed almost 9,500% in total returns over those 35 years.
Here's the real kicker: Even with dividends behind about half of those returns, J&J's dividend yield has rarely been above 3%:
It's another tale of the power of dividend growth.
Moreover, an aging U.S. population and the growth of the global middle class -- which will result in increased healthcare spending around the world -- bode well for the company's future prospects, even as it navigates the legal risks from ongoing litigation related to its opioid products.
The world's largest retailer, Walmart stands out on this list as having, by far, the most in yearly sales: In fiscal 2019, the company generated more than $514 billion in revenue, or 80% more revenue than ExxonMobil, the second-highest listed of the 11 companies featured.
Moreover, the company isn't succumbing to the rise of e-commerce as so many have feared. Sure, the so-called "retail apocalypse" that's hurting plenty of big, old-fashioned megaretailers is affecting Walmart, but the company isn't sitting still and letting Amazon and other e-commerce companies eat its lunch. To the contrary, Walmart has a burgeoning e-commerce business of its own. It has reported multiple consecutive quarters of 35%-plus e-commerce sales growth recently.
How is Walmart growing its online sales so quickly? By leveraging what it's always excelled at doing: saving money through industry-leading logistics. In May, the company announced a one-day shipping program from a small group of stores, with plans to expand it by year-end to cover about three-fourths of the U.S. population, including 40 of America's 50 biggest cities (a milestone it actually reached by August). Moreover, Walmart is also leveraging its massive grocery business, offering curbside pickup at 2,700 of its stores and delivery from 1,100.
In other words, while other brick-and-mortar retailers struggle to survive, Walmart is leveraging its massive store footprint to become even more relevant in today's commerce landscape.
Sure, it doesn't have the growth prospects of its smaller peers, and much of its effort will simply be to stave off losses to the competition, but its ability to leverage its existing distribution and retail network -- and its legacy of making the most of those assets -- should keep it paying dividends to shareholders for many years to come. With a 45-year streak of annual increases already in the books (putting it on the Dividend Aristocrat list with J&J), you know that supporting and growing the payout is a priority for the company.
Moreover, Walmart's dividend remains well supported by its earnings and cash flows. Over the past decade, the cash payout ratio has only exceeded 50% for a brief period in late 2013 and early 2014 and was just under 36% during the trailing 12 months. The company has an ample margin of safety on its payout and room to continue growing it while still retaining plenty of cash to invest in e-commerce growth and other initiatives to strengthen the business.
The lone energy company to make the cut as one of the 11 biggest dividend payers, ExxonMobil is an absolute behemoth in the oil and gas space. The company operates oil and natural gas exploration and production, pipelines and storage facilities, refining, petrochemical manufacturing, and the marketing of refined products to consumers and industrial users.
This vertically integrated business model has paid off over the years, helping the company to both ride out energy market downturns and profit from new opportunities while also paying a nice dividend that it's been able to grow in both good and bad times. The company says it's raised the payout about 6.2% on an annual basis, on average, over the past 37 years. That makes it the third Dividend Aristocrat on our list.
It's also one of the highest-yielding stocks on this list, at least as of this writing. However, it's worth noting that a significant amount of its high yield has been the product of the stock price falling sharply in recent years:
ExxonMobil has a great track record of growing its dividend, which is up 38% since the beginning of 2014. But as the chart above shows, from 2014 to August 2019, the yield more than doubled, because the stock price lost almost one-third of its value. Both crude oil and natural gas wholesale prices are down nearly half since the beginning of 2014, and while ExxonMobil has been able to ride out a tumultuous period and remain very profitable, investors must consider a lot of questions about the future prospects for the oil and gas industry.
The good news is that management isn't sitting on its hands. While it's unclear how much of the energy market renewables such as wind and solar will take from hydrocarbons -- though it's undoubtedly going to be a large portion of future energy -- the company is implementing a plan to drive down its oil and gas production costs, grow its output, and better leverage its midstream, refining, and petrochemical assets to profit from its vertical integration, even if oil prices don't meaningfully improve.
So far, its results indicate this multiyear plan is working, but the company must still complete substantial tasks to reach the cash flow goals management is counting on. It's not clear what the demand picture will be for oil and gas a decade from now. Its dividend should remain fairly safe for a number of years to come, but I wouldn't count on the biggest of big oil to anchor my dividend portfolio going forward.
Procter & Gamble
Procter & Gamble has paid a dividend every year for 128 years, something only a handful of other companies can say they've done. Along with being a Dividend Aristocrat, P&G also has the rare distinction of being considered a Dividend King -- a company that has raised its dividend payout for at least 50 straight years. At the heart of the company's success is a combination of powerful brands that consumers remain loyal to and tend to buy during any economic condition. The company's 63-year streak of annual dividend increases helps reinforce the strength of its brands and business.
The company has also taken steps to strengthen its business in recent years after decades of acquisitions built a somewhat top-heavy organization that has been struggling under its own weight.
Over the past five years, P&G has divested several of its biggest brands, including selling Duracell to Berkshire Hathaway for $4.7 billion in cash and stock and selling another 41 brands for $11.4 billion in 2016. It's been using the proceeds to improve its capital structure, including repurchasing more than 8% of shares outstanding. The company's corporate structure is much leaner, and management is now focused more closely on leveraging the brands it has retained.
It's paying off. Operating margins and cash flows have surged; operating and free cash flows are higher today than when revenues peaked:
Today's P&G may be smaller than it was a few years ago, but it's far leaner and proving more cash-flow efficient. That bodes well for the company's ability to continue paying a dividend and to extend its 60-plus-year streak of payout growth.
Bank of America
Few businesses have managed to pull off the turnaround BofA has delivered over the past decade. Coming out of the Great Recession, Bank of America represented everything that was wrong with the American banking industry and faced billions of dollars in legal and litigation risk from its mortgage business.
Fast-forward nearly a decade, and today's Bank of America is one of the best-run financial institutions in America, second only to JPMorgan in most-profitable American banks in 2018. Moreover, the improvements in its business have allowed the board -- after Fed approval -- to increase the dividend every year for the past four years.
We aren't talking small increases, either; the most recent increase was a whopping 20% raise, and the dividend is now 260% higher than it was at the start of 2016.
How impressive has Bank of America's turnaround been? Well, none other than superinvestor Warren Buffett has certainly noticed. According to Berkshire Hathaway's June 2019 Form 13-F, disclosing its public equity holdings, the company owned more than 927 million Bank of America shares, making it Berkshire's second-largest holding with a market value of nearly $25 billion at this writing.
That gives Berkshire a 9% stake in the company, pushing the maximum 10% threshold it can own of any bank before regulations limit the role it can take as an active investor.
Considering Bank of America was given Fed approval in June to repurchase $31 billion of its own stock over the next year -- well over 10% of its shares at recent prices -- it's possible Berkshire will be forced to sell BofA shares to remain below the 10% ownership threshold. If that happens, I wouldn't consider it a bearish sentiment at all.
Simply put, Bank of America is one of the best-run banks in the world now, and it's worth owning. With the company boasting a payout ratio of 25% over the past year and an aggressive plan to repurchase a substantial number of shares, investors should look for plenty more dividend growth in the years ahead.
From its roots nearly a century ago as a small animation studio, Disney has become one of the biggest entertainment companies on the planet, with an empire spanning television, streaming, merchandising, live-action and animated movies, and its popular theme parks.
Just how big has Disney become? Through August 2019, the company already had five separate movies with at least $1 billion in box office sales this year alone. The only other movie to reach $1 billion in ticket sales at this point in 2019 was Spider-Man: Far from Home, co-produced by Sony and Disney's Marvel Studios. Effectively, Disney had a hand in every billion-dollar movie release through the first eight months of 2019.
Moreover, the company saw more than 150 million people visit its theme parks in 2018. Disney is as popular and well-loved a brand as exists anywhere.
The secret to Disney's success isn't really a secret at all. No other company on earth owns a collection of entertainment properties as recognizable and popular as Disney's, including Marvel, Pixar, Lucasfilm (home of the Star Wars franchise), and legacy Disney properties. And that's before we even factor in its massive sports properties at ESPN, its existing streaming service, Hulu, and the planned launch of Disney+ in November 2019.
The company's focus on owning top properties, along with its plans to make streaming a bigger part of its offerings going forward, should help it ride out the ongoing transition by consumers away from its cable network properties. There could be continued pains as cable-derived revenues shrink, but Disney's long-play approach to owning the best content should pay off for decades to come, no matter how consumers choose to access that content.
For investors, that should result in a substantial amount of cash flows, with a portion directed back to shareholders in dividends. Its dividend yield may not be that impressive at the moment, but its ability to deliver consistent cash flows and capital growth makes it a worthy investment.
If there's one thing income investors should note about Disney that's a bit different from most other companies, it's that it doesn't pay a quarterly dividend. Actually, Disney's dividend history is a bit unique compared to that of many American companies. In 1999, the company shifted from quarterly dividends to an annual payout, citing the expense of cutting so many checks each quarter, as many investors held a very small number of shares. In 2015, the company changed its payout schedule again, shifting to a semiannual dividend. The chart below makes it appear that the company cut its payout in 2015:
However, that's not the case. On an annualized basis, Disney actually increased the payout, going from a single $1.15-per-share dividend in 2014 (paid in January 2015) to a $0.66-per-share semiannual dividend in late June 2015 and then a $0.71-per-share semiannual dividend in January 2016. The timing of payouts resulted in the company paying out more in dividends in the 2015 calendar year than normal, making it appear that the dividend got cut. It didn't.
More importantly, investors who'll be counting on Disney as a source of income need to be aware of its semiannual payout schedule versus the more usual quarterly schedule paid by most U.S. stocks.
Over the past decade, telecommunications giant AT&T has rewarded investors with consistent -- if modest -- dividend growth every year, making it the fifth Dividend Aristocrat on the list. At the heart of the company's ability to maintain and regularly grow the payout is the nature of its cash flows, which are steady and predictably generated from its wireless, pay-TV, and broadband services. Moreover, the relatively mature nature of its business has made the dividend an important part of its value as an investment, the key reason its yield is by far the highest of any stock on this list.
However, there remain questions and concerns investors should consider. Over the past half decade, AT&T paid $48.5 billion to buy DirecTV and $85 billion to acquire Time Warner, with much of the cash portion of those deals being funded by debt. AT&T's long-term debt is up 128% since the beginning of 2014 to $170.6 billion, while its share count -- stock was a major component of funding those deals -- has also increased 40%. The combination of increased debt and new shares costs AT&T about $8 billion more in interest expense and dividends than it paid in 2014.
Considering how DirecTV's business has steadily declined since the acquisition, it hasn't worked out, but there's hope for the Time Warner deal to pay off. The good news so far is that AT&T's cash flows are trending in the right direction. Through the first half of 2019, operating cash flows and free cash flows have increased 9% and 46%, respectively, on a per-share basis since 2017.
Because of its cash flows' growth, AT&T's dividend, even with its generous yield, is well supported. If management uses that improved cash flow to start chipping away at the debt load, AT&T's ability to continue growing and paying it for years to come will be even stronger.
Bigger isn't always better, but it sure helps
It's sometimes said that the bigger they are, the harder they fall. Sure, that's true sometimes, and it's a good reminder that every investment you make deserves due diligence on your part to make sure you know what you're buying. Don't just assume that the biggest company in a given business is the best.
But at the same time, all 11 of the companies described here have come to dominate their industries and are able to return a sizable portion of their earnings to investors in dividends. Whether any of them are right for your portfolio depends on factors only you can determine.