Dividend stocks can be a good way for investors to add sources of reliable passive income to their portfolios. Stocks have whipped up and down in recent years, and while this is nothing new for long-term-minded investors, diversifying your investment strategy can sometimes be just as important as diversifying your portfolio.
The key to investing in dividend stocks is to make sure they have a good track record, are generating enough free cash flow and earnings to cover their dividend, and also have the capacity to raise it in the future.
My top dividend stock to buy this month is Procter & Gamble (PG +0.31%), which has a trailing-12-month dividend yield of roughly 2.9%. Here's why I think the company is a top dividend stock to own.
Image source: Getty Images.
A Dividend King that will reliably continue to pay healthy dividends
As a dividend stock, Procter & Gamble is as reliable as it gets. The company is a Dividend King, meaning it has paid and increased its annual dividend for at least 50 years. In fact, the company has accomplished this feat for an incredible 69 years. The company is also poised to continue doing so, as reflected in its trailing free-cash-flow yield and payout ratio.
Data by YCharts.
The free-cash-flow yield is higher than the dividend yield, and the company's payout ratio is about 60%. The payout ratio looks at the amount of dividends paid out each quarter or year as a percentage of earnings. It's ideal if a company can cover its capital distributions from its earnings, so it doesn't have to dip into other sources of capital. At a 60% payout ratio, this shows Procter & Gamble has plenty of capacity to keep increasing its annual dividend.
Now, Procter & Gamble isn't exactly a high-flying artificial intelligence stock that is going to triple your money in a bull market. It's a mature blue-chip stock. However, the company is a safe defensive pick because it makes many household items, including paper towels, laundry detergent, and soap, that families use daily and will likely prioritize during a recession.
It's a good idea for investors to have some of these safer, steadier stocks in their portfolios, especially in these market conditions, which seem to flip on a dime from bullish to bearish and back again. Plus, a nearly 3% dividend yield is solid and will only get more attractive if interest rates keep falling.
