Choosing the Best Dividend Stocks

By Robert Reese , last updated September 25, 2011

Choosing the best dividend stocks is an important process for investors who are searching for stocks that offer a high yield, an established track record of stability through the years and a degree of safety in the tumultuous realm of the stock market. The best dividend stocks typically carry a strong brand name that is instantly recognizable even among inexperienced investors. The best dividend stocks also usually have demonstrated a solid background of paying out dividends to their investors. One factor that separates the best dividend stocks from mediocre stocks is a history of increasing the amount of their dividend on a consistent basis. Choosing the best dividend stocks is an excellent strategy for stock market investors seeking security and a steady stream of income.

Dividend stocks are stocks that pay out a dividend, or an allocated amount of money per share owned, to their shareholders on a quarterly basis. A big advantage of investing in dividend stocks is that they allow investors to benefit from the steady income generated by the dividend along with the potential upside of a possible increase in the price of the stock itself. An investment in the bond market, by contrast, also provides steady income but offers no possibility of a profit on the underlying investment vehicle.

Although good dividend stocks can be found in any sector of the stock market, the best dividend stocks often come from mature industries such as consumer staples, utilities, manufacturing and health care rather than more speculative sectors of the market.

In choosing the best dividend stocks, many investors focus on stocks with an annual dividend yield ranging from 2 percent to 6 percent. A rate below 2 percent does not typically offer much of an incentive to purchase the stock, and a rate above 6 percent can be a warning sign of a risky investment.

A crucial consideration for active investors who are attempting to choose the best dividend stock is a stock's ex-dividend date, which is the day on which a company's stock begins trading without the dividend it has just paid out. To receive the dividend, investors must buy shares of the stock on or before the final business day before the ex-dividend date. On the ex-dividend date, the company's stock starts trading with the current dividend subtracted from the price of its shares. The stock's price will often go up in anticipation of the dividend, then decrease by the amount of the dividend on the ex-dividend date.

As a point of reference, the following stocks are among those that have increased their dividend every year for at least the past 40 years: Diebold, Johnson & Johnson, the Coca-Cola Company, Procter & Gamble, the 3M Company, Colgate-Palmolive, Lowe's, Hormel Foods, Altria Group and Stanley Black & Decker, Inc. Any of these companies would be a good place to start in researching your next investment with an eye toward choosing the best dividend stocks. As with any form of investing, it is imperative for the investor to do his homework before acting.

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