Dividend stocks are one of the most popular tools for generating stable passive income. This type of investment attracts both novice and experienced investors who want to minimize risks and receive regular payments in the form of dividends. In this article, we will take a closer look at what dividend stocks are, how they work, their advantages and disadvantages, and provide examples of U.S. companies that consistently pay dividends.
What Are Dividend Stocks?
Dividend stocks are shares of companies that pay a portion of their profits to shareholders in the form of dividends. Unlike regular stocks, dividend stocks are often owned by large and stable companies that not only provide income through growth in value but also offer regular payments to shareholders.
The most well-known dividend stocks in the U.S. market belong to companies like Coca-Cola, Procter & Gamble, Johnson & Johnson, and McDonald's. These companies are famous not only for their long existence but also for consistently paying dividends for decades. There is even a specific category of companies, known as "Dividend Aristocrats," which have been paying and increasing their dividend payouts for at least 25 years.
Dividend History
In the U.S., the history of dividends dates back to the first public companies. One of the first American companies to pay dividends was The Bank of North America, founded in 1781. The company paid dividends to its shareholders from profits earned through successful commercial activities.
Subsequently, dividend stocks became popular among American corporations, especially after the Great Depression of the 1930s, when many investors sought more stable and secure ways to preserve capital. Large companies began actively using dividends to attract long-term investors. For example, Coca-Cola has continuously increased its dividend payouts for 63 years.
Advantages of Dividend Stocks
Stable Source of Income. One of the main advantages of dividend stocks is the regularity of payments. For example, Procter & Gamble has been paying dividends for 69 years, increasing them every time, making its shares attractive to investors seeking stable passive income.
Lower Volatility. Companies that regularly pay dividends are generally more stable than young startups. For instance, Johnson & Johnson shares are considered "defensive assets" due to the company’s long history of stable dividends and solid financial position.
Inflation Protection. Receiving dividends can help investors cope with inflation, as many companies increase their dividends in line with their revenue growth. McDonald's has increased dividends every year for the past 49 years, allowing investors to maintain their purchasing power.
Companies with a Good Reputation. Dividend stocks usually belong to large, well-known companies that have already earned trust in the market. For example, Coca-Cola and PepsiCo are globally recognized brands, and their stocks are considered reliable for long-term investment.
Disadvantages of Dividend Stocks
Limited Growth Potential. Companies that pay dividends typically reinvest a smaller portion of their profits into development, which may limit the stock’s growth potential. For instance, technology giants like Amazon prefer not to pay dividends but instead reinvest profits into innovation and growth, making them more attractive to investors focused on capital growth.
Dependence on Economic Conditions. In times of economic downturn, companies may reduce dividends. For example, during the 2008 crisis, companies like General Electric were forced to cut dividend payments significantly, negatively affecting investors' incomes.
Taxation. In the U.S., dividends are subject to taxes, which can reduce the real return for investors. The tax on dividends can reach up to 30%, depending on the investor category. This should be taken into account when planning long-term investments in dividend stocks.
How to Choose Dividend Stocks
Selecting dividend stocks requires a deep analysis of a company’s financial metrics, business model, and dividend payment history. Here are a few key factors to consider:
Dividend Yield. Dividend yield is the ratio of the annual dividend amount to the stock’s market price. For example, if a stock costs $100 and the company pays $5 per year, the dividend yield would be 5%. However, an excessively high yield may indicate company problems, so it’s important to consider other factors.
Payout Ratio. This ratio shows what portion of the company’s profits is allocated to dividend payments. The optimal level is considered to be 40-60%. If the payout ratio is too high (over 80%), it may indicate that the company is allocating too much of its profits to dividends, which can be risky in times of economic hardship.
Dividend Payment History. Reliable dividend stocks have a long history of payments, which is a sign of the company’s stability.
Financial Stability of the Company. When choosing dividend stocks, it’s important to analyse the company’s financial statements, such as the balance sheet, income statement, and cash flow statement. Companies with high profitability and low debt levels are more likely to continue paying dividends even during economic downturns.
Examples of Successful Dividend Stocks in the U.S. Market
Coca-Cola (KO). This company is one of the most famous examples of a successful dividend strategy. Coca-Cola has been paying dividends for more than 100 years and has increased them over the past 63 years. In 2024, Coca-Cola’s dividend yield is about 2.7%, making its shares attractive to long-term investors seeking stable income.
Johnson & Johnson (JNJ). This healthcare company is renowned for its stability and high dividend yield. Johnson & Johnson has increased its dividends for 63 consecutive years, one of the best records in the U.S. market.
Procter & Gamble (PG). Procter & Gamble is one of the largest producers of household goods, and its shares are considered a safe choice for long-term investors. The company has increased its dividends annually for the past 69 years.
PepsiCo (PEP). Another giant in the consumer goods industry, which has increased dividends annually for the past 53 years. In 2024, PepsiCo’s dividend yield is about 3%.
Risks of Dividend Stocks
Despite their advantages, dividend stocks also carry certain risks that are important to consider:
Reduction or Suspension of Dividends. Even the most stable companies can reduce dividends in times of economic difficulties. For example, in 2020, when the COVID-19 pandemic disrupted the global economy, companies like Disney were forced to temporarily suspend dividend payments to maintain financial stability.
Inflation Risks. If the growth of dividends doesn’t keep pace with inflation, it can reduce the real return for investors. Some companies may slow dividend growth, especially during periods of economic uncertainty.
Dependence on Corporate Profits. Dividends are paid only when the company earns a profit. If a company’s profits fall due to internal or external factors, it can negatively affect dividend payments. For example, in the oil and gas industry, companies often face price fluctuations in raw materials, which directly affects their profits and dividends.
Conclusion
Dividend stocks provide investors with an excellent way to generate stable income and minimise risks. Companies with a long history of dividend payments, such as Coca-Cola, Johnson & Johnson, and Procter & Gamble, are good examples of how to build a long-term investment portfolio focused on stability and income.