The great thing about a good dividend stock is that it pays you every quarter, or in some cases every month, while also generating solid long-term returns for retirement or some other use. It is a win-win, as they say.
Here are three top dividend stocks within the financial sector that do both -- pay you a high-yield dividend every quarter and have an excellent track record of generating double-digit returns over the long term, with excellent growth prospects to boot.
JPMorgan Chase: A fortress for dividends
JPMorgan Chase (JPM 0.65%) is the largest bank in the U.S. and has been one of the sector's best performers over the past decade, ranking among the top five banks in annualized returns. This year, the stock is up 29% through Thursday's close.
JPMorgan Chase has all the great qualities of a top dividend stock. For starters, it pays out $0.90 per share each quarter, or $3.60 per share annually. It has an above-average yield of 2.2%, which means that it pays out 2.2% of its share price in dividends. The average among S&P 500 index companies is about 1.4%.
It also has a low payout ratio of 27.6%, which means it pays out that much of its earnings as a dividend -- lower is better, and this is a good, sustainable percentage. JPMorgan has increased its dividend for the past eight straight years, and the dividend has grown by about 15% per year over the past five years.
Not only is JPMorgan the largest bank in the country, it is also the most efficient of the big banks. Its efficiency ratio -- a key metric that tracks the percentage of expenses in relation to revenue -- stood at 57% in the first quarter. And it is well known for its "fortress" balance sheet, which means its debt is low in relation to its equity and cash flow. That is a great formula for lots of liquidity and, in turn, funds to increase its dividend.
T. Rowe Price: A Dividend Aristocrat
T. Rowe Price (TROW -0.07%) has a lot in common with JPMorgan Chase. The asset manager is one of the most consistent performers in its space and has its own fortress balance sheet -- the company has no debt, as in zero.
T. Rowe Price just increased its dividend for the 35th straight year, bumping it up to $1.08 per share per quarter, or $4.32 per share annually. The dividend has increased by an average of 12% over the past five years. Its enviable track record of dividend increases makes it a Dividend Aristocrat, which is an S&P 500 company that raises its dividend for at least 25 consecutive years. There are only 65 stocks on the market that have achieved this status. It is a testament to the firm's consistency and stability.
The asset management firm pays out a yield of 2.3%, with a payout ratio of 35% -- both very solid numbers. The company has steadily gained market share over the past decade, leveraging its strong investment performance. Over the last 10 years, T. Rowe Price has posted an average annual return of 15%.
CME Group: A moat to protect the dividend
CME Group (CME 1.90%), which started as the Chicago Mercantile Exchange, runs one of the largest derivatives exchanges in the world. It now runs not only that exchange, but also the Chicago Board of Trade, the New York Mercantile Exchange, and the Commodities Exchange. It is not just a leader in this space, but one of only a few players, so there is little competition.
That stability has allowed the CME Group to increase its dividend for the last 11 years straight. This year, the company raised the dividend to $0.90 per share. It has a five-year annual growth rate of about 10%. CME also offers a special dividend at the end of the year that is based on year-end earnings. Last year, the special dividend was $2.50 per share, the same as the previous year. Combined, investors are earning about $6.10 per share annually.
Also, CME Group pays out its dividend at a yield of 1.7%, which is slightly above the S&P 500 average. The payout ratio is slightly higher than normal at about 53%, but that is a little inflated as CME just came through a difficult 2020 due the pandemic and recession. The ratio should move back down under 50%, where it has historically been, as earnings go back up. CME Group makes money on fees from trades and transactions on its exchanges, so it has steady, repeatable income. In the first quarter, trading activity on its interest-rate products, which make up most of its trading volume, spiked compared to the previous three quarters; it should remain high as the economy improves and rates increase. That means more fees and more earnings.
CME Group has steady fee income, low overhead, little competition, high margins, and lots of cash flow. It also has excellent returns, averaging about 15% over the past 10 years. This year it is up 20%. Like the other stocks mentioned, CME Group is not just a great dividend stock -- it should also continue to generate long-term gains.