Insider Monkey

16 Most Profitable Dividend Stocks

Ramish Cheema
9 min read

In This Article:

In this piece, we will take a look at the 16 most profitable dividend stocks. If you want to skip our introduction to dividends and the general investing climate, then take a look at 5 Most Profitable Dividend Stocks.

In a stock market that continues to remain unpredictable, dividends offer a sense of stability. A regular income from shares which is unrelated to trading profits provides stability in a high inflationary environment, and if dividend stocks are utilized well, then the prudent investor can make a lot of money over a long time duration. The best example of this principle is Warren Buffett of Berkshire Hathaway, who has built a multi-billion dollar portfolio by simply picking the right stocks and then reinvesting their dividends to buy more shares.

Another little known fact about dividend stocks is that they are particularly attractive to hold during a high interest rate environment. In fact, data shows that dividend stocks outperform the S&P500 in terms of total returns in periods of high interest rates. Such periods generally see poor stock market performance since high rates affect the business environment, but dividend stocks pay out higher rates of dividends during periods of tight monetary policy. We took a detailed look at the benefits of dividend stocks in our coverage of 25 Things Every Dividend Investor Should Know so you should check it out to learn more unknown facts about dividend investing.

A key differentiator between dividend and non-dividend paying companies is the nature of their business. In accounting, any profit that a firm earns is put under the retained earnings account except for the money paid out to investors as dividends. Firms that seek to gain market share by developing more products or opening more offices tend to use the retained earnings as their wallet. However, companies that have already grown or are operating in stable and mature markets such as the crude oil industry often seek out investors by paying them dividends. Naturally, dividends paid also beef up the value of a firm's shares, and you're likely to see the share price fall if a company announces a dividend cut or suspension since dividend lovers are likely to sell the shares and park their money elsewhere.

Putting two and two together, the higher the profits that a firm earns the more it can afford to pay out dividends. An added cherry on top is if the company is growing. This growth would boost its dividends as well as its share price. And since we're on the topic of growth, the compounding effect of dividends a.k.a. buying more shares from the dividends has the potential to deliver returns like Warren Buffett's if done over the course of decades. S&P Global's research shows that $1 invested in non-dividend stocks in 1930 would be worth a cool $197 by 2021. However, a dividend paying stock would be worth a whopping $6,430 by the end of the same time period - making Warren Buffett's investment portfolio appear less of an intriguing mystery and more of a tale of patience and stock picking prowess. For those of you who love percentages, the difference between the annualized return (which includes dividends) and the price return (which is share price appreciation) is 70% for stocks of the S&P in a period of ten years. Growth, it seems, is at the heart of dividend investing, and we've also taken a look at 12 Best Dividend Stocks For Steady Growth out of which the top three stock picks are L3Harris Technologies, Inc. (NYSE:LHX), Tractor Supply Company (NASDAQ:TSCO), and Morningstar, Inc. (NASDAQ:MORN).

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