A great dividend stock can completely change your portfolio if you are a retiree or an income investor. There are a few key characteristics that need to be considered when choosing among the many candidates. The best dividend stocks should pay a relatively high dividend yield -- the higher the yield, the better your return on investment.
However, you shouldn't just pick the stocks with the highest yields, because these are often risky companies that the market believes will be unable to sustain their distributions. Instead, you should look for mature, stable companies that are unlikely to experience drastic changes to cash flows in the foreseeable future.
These three stocks all emerged from a challenging 2020 and are likely to maintain their attractive dividend yields in 2021, regardless of how quickly the global economy recovers from the pandemic.
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1. American Electric Power
American Electric Power (AEP 0.04%) operates a large electric transmission system and is based in Columbus, Ohio. It delivers electricity to 5.5 million regulated customers in 11 states. It's also a large energy producer, with more than 30,000 megawatts of generating capacity.
Utility stocks are very popular among dividend investors. They have predictable cash flows because people generally don't alter their electric consumption across economic cycles. Without much opportunity for high growth, utility companies tend to take their stable cash flows and return capital to shareholders in the form of dividends.
American Electric Power is no exception. The stock pays out $0.74 per share each quarter. That 3.3% dividend yield is a nice income stream for investors. Importantly, American Electric looks set to maintain a stable dividend. The 64% payout ratio indicates that the company is producing enough profit to support the dividend -- that's coming during a year in which adjusted earnings increased despite revenue falling 0.7%. Management issued guidance calling for 5% to 7% annual earnings growth in 2021, so the outlook is positive.
2. Verizon Communications
Verizon (VZ 0.31%) is the one of the largest telecommunications providers in the U.S., with nearly 95 million retail wireless connections. Telecommunications customers behave similarly to utility consumers, so dividend investors often enjoy the predictable subscription revenue that these companies generate each month. Further, the expansion of 5G is creating new growth opportunities for wireless providers, as households adopt more connected devices and potentially replace existing wireline connections.
Verizon is frequently ranked as the best overall mobile network in the U.S., though this supremacy is being challenged as subscribers begin to transfer to 5G. The company trails its biggest rivals in 5G download speed, but the differences are modest. Importantly, Verizon scores well for its breadth of coverage and strong presence in rural areas or for people driving across the country. Even if Verizon loses some market share in the next generation of wireless communications, it's still in a great position to sustain modest growth moving forward.
Verizon shares are paying an enviable 4.4% dividend yield, which is achieved on a conservative 58% payout ratio. That comes after a tough year in which earnings per share fell 7.5%. Despite all of the challenges faced in 2020, the company still delivered strong free cash flow, and it is forecasting 2% to 5% adjusted earnings growth for 2021. Verizon's dividend has increased every year since 2007, and its outlook indicates that there's no sign of this stopping in the near future.
3. Kimberly-Clark
Kimberly-Clark (KMB +0.85%) is a consumer staples stock and a global leader in personal paper products. Its portfolio includes well-known brands such as Huggies, Kleenex, Kotex, Scott, Cottonelle. The company's brands are market leaders in more than 80 countries, demonstrating serious geographical and product diversification. That sort of leadership in several mature industries is an excellent basis for stable cash flows for Kimberly-Clark. Dividend investors love businesses with those characteristics.
If you're thinking about buying some Kimberly-Clark shares, then you'll be happy to find out that the stock currently pays a 3.3% forward dividend yield at a manageable 62% payout ratio. Company management also recently approved a 6.5% dividend increase, so the yield over the next year should be closer to 3.5%. It would seem that investors can get an above-average yield without taking on more risk than they would find elsewhere in the S&P 500.
Kimberly Clark's fundamental performance is also solid enough to support a growing dividend. Sales rose 4% last year, and earnings per share increased 10%. Demand for certain basic goods rose as people were stuck at home last year, but that's still an impressive feat amid a global pandemic that threatened travel, trade, and consumer confidence.
The company's guidance calls for another year of similar revenue growth in 2021, and earnings are expected to grow 0% to 3% over the next 12 months. This isn't a story that would interest growth investors, but it's all encouraging news for your dividend portfolio.
