With record low-interest rates and a lackluster property market, more investors are turning to equities to seek income. Of course, not all equities are ideal for income seekers. Most don’t pay a dividend. Some of the dividend rates are lower than the yield on Treasury bonds. Some companies pay dividends that they can’t afford.
For income-seeking investors, the market for dividends is vast and complex. So, we decided to focus on the sectors instead of the stocks to pin down the ones that had the best chances of providing a high return. This free dividend investing guide makes it easy to build your portfolio with our top 10 dividend stocks.
The logic here is straightforward – some industries have better economics than others. If you own a biotech startup or a consumer tech company, the industry forces the business to keep reinvesting cash. The company management prefers to keep cash on hand in case they need it for unexpected expenses or downturns in the business.
Other industries are better for dividends. Businesses in these industries produce more cash than they know how to use. Some industries still produce humongous amounts of cash every quarter, but there is no point in reinvesting this cash since the business doesn’t need it. These cash-rich industries are a lot better for dividends. They could be considered the best dividend stocks. It makes sense to focus on these industries if you are trying to find the best dividend stocks.
The 8 best sectors for dividend paying stocks:
Here’s the thing with utilities – they’re very capital intensive in the short-term, but handsomely profitable over the long-term. Once the infrastructure has been invested in and completed, the cash rolls in for years. Most utilities have a set network that requires maintenance and upgrades, but no major investments. Electricity suppliers, telecommunication companies, and energy companies all fall into this category. NextEra Energy Inc (NEE) offers 2.8% dividend yield and is a good example of the profitability and potential for growth in the sector.
Financial companies have had a horrible few years. Since the financial collapse in 2008, people have stopped trusting big banks altogether. But this has unfairly impacted the valuations of some very well-run companies. One of which is Wells Fargo (WFC). Now, there is no doubt Wells has had its fair share of controversy lately. The accounts scandal that broke out a while back has eroded the brand value somewhat. Even Warren Buffett said it was a mistake. But Buffett clearly still believes in the bank’s potential. In a recent interview he said the problems were short term and that he would have bought more shares at current prices. At a 3.4% dividend yield, it’s not hard to see why.
3. Real Estate
If there is a clear cash cow in the current low-rate environment, it’s real estate. Simon Property Group Inc (SPG), for example, is a Real Estate Investment Trust (REIT) that holds a portfolio filled with premium properties. The trust has managed to grow its payout by 70% in the past 5 years and currently the stock yields 3.2% in dividends.
Consumer technology isn’t usually a great sector for dividends. The industry is competitive and many players fail to turn a profit or pay dividends. But there’s an exception to the rule – Apple Inc (AAPL),. The iPhone and iPad make has over $237 billion in cash. It’s been slowly paying this back to shareholders in the form of dividends and buybacks. The current yield on Apple shares is 2.1%, but that return is a lot higher when you consider the buyback program. Similarly, IBM offers a surprisingly great dividend yield.
Energy sector stocks can strike a fine balance between growth and stability. Oil prices have come crashing down over the past few years, which has been horrible for a lot of energy stocks, but not for refiners like Phillips 66 (PSX). Right now the oil refiner yield 3% in dividends. It’s likely the company can maintain this rate since low oil prices actually benefit the bottom line for refiners.
Medical products, supplies, healthcare providers and biotechnology companies can generate some impressive returns if they keep risks low. Thankfully, a number of healthcare companies pay attractive dividends. On average the sector yield 2.28% in dividends, but companies like Abbott and Johnson & Johnson pay much higher rates (2.5% and 2.94%).
If you think materials, you should picture metals, chemicals, construction materials, forest, wood and paper products. These companies are compounding machines in their niches. Commodity prices do have an impact on profits, but most of these companies know how to manage this well and are well diversified. One of the best dividend stocks in this sector is Dow Chemicals (DOW). It currently yields 3.4% in dividends.
Finally, the telecommunications sector has emerged as the industry with the best dividend stocks. AT&T (T) is a great example of how a well managed telecom company can payout high dividends. The company yield close to 5% on market price right now. That’s nearly double the S&P 500’s average dividend yield. Vodafone is another great example from this sector. That stock yields more than 5% right now.
The best dividend stocks usually come from companies and industries that are awash in cash. Some industries simply have better cash flows and this is used to pay back investors. If you’re trying to construct a rock-solid dividend portfolio from scratch, it helps to understand the specific dynamics of each industry.
The telecommunications, energy, materials, healthcare, real estate, utilities and financial industries are all excellent places to seek out income-generating opportunities. You’ll find firms in each of these sectors that offer higher dividends than the US treasury yield or the average yield of the S&P 500. Consumer tech is the only exception to this, since most companies in this sector are either too volatile or do not make a profit. Apple and IBM may be the only exceptions since their dividend yields are too attractive to ignore.
If you’re trying to create a well diversified income portfolio, look for the best dividend stocks in these amazing sectors.