Thinking about your goals for the year ahead? How about becoming a dividend investor in 2023? Dividend investing is a great way to earn passive income and to build long-term wealth, and there are plenty of great dividend stocks that you can invest in right now.
It can feel intimidating to get started, and it sometimes seems like you need to invest a lot of capital in order to start generating significant dividend income. But you can earn $1,000 in dividend income in 2023 by buying 266 shares of one consumer-goods stock, the tobacco company Altria (MO -0.15%).
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Don't fall in love with every high-yield stock
You don't want to invest in just any dividend stock with a high yield. Often, when you see an abnormally high yield, it can be the result of a falling share price. It can also mean that the market thinks that the dividend will be cut.
So it's best to look not just at yield but to also consider a stock's performance, its track record in terms of consistently paying a dividend, and its dividend growth rate. Altria has a jumbo-size yield of 8.4%, but it also looks like a good choice based on these other criteria.
Study the track record
You would be hard-pressed to find a stock with a better, or longer, dividend track record than Altria. It's a Dividend King, meaning that it has increased its payout annually for 50 years in a row and counting (52 years, in this case).
As of July, only 41 stocks in the market qualified as Dividend Kings. When a stock is in this rarefied air, you know that the company takes its dividend payout seriously and considers increasing it to be a long-term priority. Any business with a streak of 50-plus years is unlikely to want to break that streak and have to start over at zero.
Check the coverage
Investors also want to make sure that a stock has the money coming in to continue to pay out its dividend with relative comfort. Investors can look at a stock's dividend payout ratio to ascertain how comfortable this payout is.
While Altria's dividend payout ratio of about 75% is a bit higher than you would normally like to see, it can afford to continue funding this dividend from its earnings.
It's important to remember that tobacco is a mature, stable business and not an industry that will expand much in the future, so Altria doesn't need to invest a lot of its cash into cutting-edge technology or new growth initiatives. Because of this, the company is positioned to return most of its earnings to shareholders in the form of dividends.
Market-beating performance
Altria isn't one of the stocks that have seen its dividend yield spike because of a plummeting share price in 2022. While the stock price has been fairly lackluster with a 1.5% gain over the past 12 months and a 5% decline year to date, this is a vastly better performance than the broader market, which is in bear territory.
This is because Altria is a defensive stock with resilient earnings. People who smoke typically aren't going to stop just because the economy is slowing. This is a big part of what allows Altria to be a consistent dividend payer over the years: It has fairly predictable income.
The nuts and bolts of bringing in $1,000 in dividend payments
With a share price of $45.24 and an annual dividend payout of $3.76, Altria yields a cool 8.4%. An investor looking to bring in $1,000 of dividend income in a year would need to buy 266 shares of Altria, for a total investment of about $12,000. Investing that much might sound like a barrier to entry depending on where you are in your investing journey, but you don't have to buy all 266 shares at once; you can start with just a few shares. The longest journeys begin with a single step.
You can start investing now and begin receiving dividends that you can reinvest to help you reach your goal quicker. And while it's great to focus on accumulating 266 shares of Altria to hit this milestone, you can also use your dividends to diversify into a portfolio of other stocks over the long term, including other dividend payers and other types of shares, like growth and value stocks.
Ideally, you'll eventually build a portfolio with multiple stocks, with some paying market-beating dividends and others appreciating in price.
As a mature stock in a business with slow to no growth, Altria isn't going to double in price anytime soon. But for investors who have the goal of building up their passive income, it's a great building block to start with thanks to its high yield, relatively safe payout ratio, and multidecade track record of dividend growth.
Start buying some shares of Altria, work your way up to 266, and before you know it, you'll be a dividend investor making $1,000 a year in passive income. Don't forget to invest in other opportunities along the way and consider this to be a key foundational piece of a well-rounded portfolio.
