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Adding a few quality high yield dividend stocks to your portfolio can be a quick way to boost your income. My wife and I own several of these types of companies in our dividend stock portfolio.
Not only can owning these stocks give you an immediate boost, they also provide a long term source of stable income year after year.
You won’t find a ton of future dividend growth with these companies … but that’s okay. Assuming you are building a diversified portfolio of stocks, adding a few of these companies makes a lot of sense.
So how can you find high yield dividend stocks?
Investors may have different criteria, but let’s take a look at my process for finding these high income stocks.
How to Find High Yield Dividend Stocks
Of all the different types of dividend paying stocks … the high yield companies are by far the easiest to spot.
The bad news is that a high yield stock may seem very tempting, but could be a huge trap. With interest rates so low … who wouldn’t rather invest their money into a stock with a 8% yield vs a savings account paying under 1%?
When we first started investing in our portfolio, I remember quickly realizing some high yields are too good to be true. Make sure to do your research before investing in any stock … and that goes for high yield dividend companies too!
As I mentioned earlier, these companies can be a bit risky if you don’t watch out.
Let’s take a quick look at some of the criteria I use to pick out high yield dividend stocks.
Step 1 – 10+ Years of Dividend Growth
For foundational stocks, I am looking for 25+ years of consistent dividend growth. Remember … these are companies that are building a solid foundation of income and growth.
When it comes to current dividend income though … I am not as concerned with such a long history. At a minimum, however … I need at least 10+ years of dividend growth.
This growth likely won’t be a lot … probably 2% per year or so … but a company will show signs of small growth.
Remember that with these companies we are focused on current income more than future income growth.
Step 2 – Payout Ratio Under 80% (Preferably 60%)
For most of the stocks in our dividend income portfolio, I want to look for companies with a payout ratio of 60% or less.
However, these high yield companies are a bit different. So I try and make an exception.
Because many of these companies are not focused on dividend growth, I adjust my payout ratio to look for anything that is 80% or less.
I just need to be on the lookout though to make sure the overall trend is not pushing towards 100%. As the dividend takes up more and more of earnings (up to 100%), I get a little more nervous about the sustainability of it.
Step 3 – Current Yield Above 4%
This isn’t necessarily a hard requirement, but we are looking for yield with these stocks.
I consider most companies with a current yield above 4% to be in this category.
Just a refresher … most companies with a yield between 2% and 3% are usually in my foundational stock category. And anything below 2% are usually high dividend growth stocks.
I feel there is a place for all three types of dividend stocks in a income portfolio.
Typically these companies have a higher yield (over 4%) but have much slower dividend growth (under 6% annually).
2 Quality High Yield Dividend Stocks for 2021
So now that we know how I try and look for high yield dividend stocks, let’s take a look at a couple I found for 2021.
Keep in mind, I am not necessarily buying these companies at this point. However, these are a couple of stocks that are on my radar.
Just like investing in foundation stocks and high growth dividend stocks … high yielding stocks have their place in any income portfolio.
As always … please don’t take this as advice to buy these companies. It is important to do your own research before investing.
Note – If something changes throughout the year (good or bad), I will certainly update my list.
All of the values and ratios referenced below were taken from The DRiP Investing Resource Center with data compiled on February 2, 2021.
1 – Consolidated Edison (ED)
Some dividend investors consider Consolidated Edison to be a foundation stock. In many ways … it has a lot of characteristics to be considered one too.
To be honest, Consolidated Edison was the first dividend stock that my wife and I ever purchased back in 2008. Since that time, we have earned more dividend income from the company ($1,111.21) than what we paid for our 25 original shares ($977.50).
Our annual dividend income from the company (as of February 2021) is $127.26.
So yes … ED is definitely a foundation stock for our portfolio. In fact, I would consider it a buy and hold forever stock.
But as the years go on owning this company … I have realized that the dividend growth is consistently below the 6% benchmark that I look for.
I still think this is a great stock to consider for a portfolio … but I don’t consider it a foundation stock. That is … a company that raises dividends consistently between 5% to 7% every year … for 25+ years.
And ED is certainly not a high dividend growth stock. Those types of companies average double digit annual dividend increases.
I consider Consolidated Edison to be a high yield stock at this point. Take a look at some of the dividend metrics I like to use in my analysis below –
ED Dividend Growth Metrics
- Years of Dividend Growth – 47
- Current Yield – 4.38%
- Payout Ratio – 76.73%
- 5 Year DGR – 3.3%
- 10 Year DGR – 2.5%
As you can see, while the company has a nice juicy 4.38% current yield … it doesn’t grow that fast. The 10 year dividend growth rate is 2.5% and the 5 year is slightly higher at 3.3%.
The most recent increase announced in January (2021) was a 1.3% increase. So as you can see … there is not a lot of growth.
However … you get that initial hit of a 4% yield on new shares!
That is what is great about high yield dividend stocks.
2 – Verizon Communications (VZ)
We currently do not own any shares of Verizon Communications in our dividend stock portfolio. However, that will likely change in 2021 as we look to build up our portfolio.
In full disclosure … we did own shares of VZ from 2014 to 2019.
We purchased shares through the companies direct stock purchase plan, which was administered by Computershare. Unfortunately the maintenance fees became too much and at the time transferring our shares was not an option.
We ended up selling our shares of VZ and used the funds to invest elsewhere.
Despite all this … I still believe Verizon is a solid high dividend growth stock and one that is on my radar again. Take a look at some of the dividend metrics I like to use in my analysis below –
VZ Dividend Growth Metrics
- Years of Dividend Growth – 16
- Current Yield – 4.58%
- Payout Ratio – 56.79%
- 5 Year DGR – 2.2%
- 10 Year DGR – 2.6%
Just last fall (September 2020), the company announced their latest dividend increase of 1.95%. This increase falls in line with past dividend growth rate averages of 2.6% for 10 years and 2.2% for 5 years.
The good news is that new investment dollars into Verizon will get a lofty 4.5% yield immediately on their money!
Other High Yield Dividend Stocks to Consider
So why did I only include two high yield dividend stocks on my list for 2021? Because I feel that these are probably the riskiest of all the different types of dividend stocks.
I still think that there is a place in your portfolio for them. But these companies can be sneaky if you don’t watch them.
There are however two other companies that I will mention briefly … because we own shares in both.
We don’t have any plans to sell our shares anytime soon – unless these companies announce a dividend cut. That would be a quick sell order for us.
AT&T currently provides $208.00 of income annually to our portfolio with a 7.18% current yield. The company did not announce a dividend increase in 2020, so we are currently holding our shares for now. The good news is that they are still maintaining their dividend from 2019.
Altria currently pays us $171.41 of annual income in our portfolio with a 8.07% current yield. The company did announce a 2.38% dividend increase last summer (2020) and we are adding a few shares here and there to our portfolio.
Building Sustainable Dividend Income
Building a sustainable dividend income stream is dependent on having a diversified portfolio of blue chip stocks.
The first step (if I had to start from scratch) is to build your foundation for the portfolio. These are stocks to buy and hold forever and will be your support during turbulent times. Companies like Johnson & Johnson (JNJ) and Procter & Gamble (PG) come to mind here.
After the foundation is built … it is time to add some other types of stocks including high dividend growth companies. These companies may not have a super high yield … but they have double digit dividend growth. My preference here would be to look at companies like Lowe’s (LOW) and Visa (V).
Finally, there is definitely a place for high yielding stocks … of which we are discussing here. These are those companies that pay you a solid yield (way more than a savings account) right now. While they may not have huge future growth … they make up for it when you initially purchase the stock.
My favorite two companies right now (2021) for high yield growth are – Consolidated Edison (ED) and Verizon (VZ).
What high yield dividend stocks do you own or are on your current wish list?