A diversified portfolio with stocks in different categories and industries is the best way for most people to maximize their investments. If you have $1,000 available to invest and are in the market for an excellent dividend stock, consider Ally Financial (ALLY 0.26%). Here's why it could be the ultimate dividend stock.
What makes a great dividend stock?
The yield is probably the first thing on an investor's list when thinking about a great dividend stock. The yield is the rate of return on the investment. If a dividend yields 1.35%, which is the average S&P 500 yield, you're making that much annually on your principal, or the amount of money you put in.
For example, if you invested $100 in a stock whose dividend yield is 1.35%, you would receive $1.35 annually. That's why the yield, more so than the actual amount of the dividend itself, is what gets the attention.
But yield isn't the only feature that makes a great dividend. In fact, a yield that's too high can be a red flag. It works conversely with the stock price, and a high yield due to falling share price can signal trouble at the company.
Even if it doesn't, there are other factors that are important in a dividend stock. One is reliability. A dividend doesn't mean much if you can't rely on it to be paid. That's especially true for retirees or others who depend on passive income.
Lastly, you want to see the payout increasing. If it isn't, the yield will fall, and you won't be maximizing your investment and passive income potential over time. A dividend that isn't growing can signal a company in distress, and a growing dividend signals a company that's committed to creating shareholder value.
How does Ally stack up here?
Ally stock yields 3% at the current price. That's more than double the S&P 500 average, putting it into a category of high-yield stocks. It's not the highest out there, but it's steady, reliable, and growing.
Ally is an interesting stock because it's a mix of the old and new. It was spun off as the financial segment of General Motors, so it has more than a century of experience as a traditional, established financial company.
Auto loans remain its core business, and it's the top prime auto lender in the country. It has troves of data that inform all of its auto lending decisions, which is why it has strong asset quality and credit performance despite the hostile lending environment. There were a record 3.8 million loan applications in the 2024 first quarter, with $9.8 billion in originations.
When it was created as its own bank, it embraced a digital model and is the largest all-digital bank in the U.S. That gives it an edge over other banks that are moving toward digital services.
Customers love its services, and it added more than 100,000 new personal accounts in the first quarter. Retail deposits increased by $2.9 billion in the first quarter for a total of $145.1 billion. Retail customers are engaging with Ally's platform, and 85% of investing accounts are coming from deposit account holders.
Ally hasn't always increased its dividend annually. The bank business is cyclical, and many banks keep their dividends steady under pressure. Ally didn't raise its dividend last year, but it hasn't missed a payment since it started its payout in 2016, two years after its initial public offering. It has grown 275% since then, which is an excellent track record for dividend growth as compared with other bank stocks and financial stocks.
No wonder it's a Buffett stock
Warren Buffett's holding company, Berkshire Hathaway, owns a 9.5% stake in Ally. Buffett loves dividends because they demonstrate management's commitment to shareholders and provide security and passive income. Buying Ally stock is an excellent way to follow Buffett's approach and reap the benefits of dividend investing.
