High-yielding dividend stocks can be attractive for income-focused investors looking for reliable, passive cash flow. However, not all high-dividend stocks are created equal. Securities should be examined beyond just their yield profiles to ensure they are a sound investment.
While a high yield stock might provide attractive income potential, no dividend can compensate for a tanking share price. Not all high yield stocks are considered safe, and some can be considered dividend “traps.” High dividend payouts can be indicative of underlying financial issues within a given company. For example, companies with unsustainably high payout ratios, where a large portion of earnings is paid as dividends can limit reinvestment in the business, ultimately limiting the business’ ability to operate day-to-day.
In this article we'll look at some high yield dividend stocks that we consider “safe” and explain how we arrived at the list.
How Dividend Stock Picks Were Chosen
While this article explains my own process and belief system for selecting what I consider to be “safe” dividend stocks, that term applies to my assessment of the company to continue paying the dividend for a long time. All stocks are at risk of extreme price changes, regardless of how much dividend income they produce.
I prioritize larger companies due to the potential for volatility associated with smaller companies. Quality is assessed through consistent cash flows and balance sheets. I try to avoid those trading at all-time high valuations. The dividend must be both strong and sustainable, with a history of steady increases and a reasonable payout ratio. I also consider long-term price potential based on historical performance and technical analysis, looking for stocks with room for appreciation.
1. PepsiCo [PEP]
Business Overview
- Recent Share Price: $64.76
- Sector: Consumer Staples
- Dividend Yield: 3.3%
PepsiCo is a multinational food and beverage conglomerate with an expansive portfolio of well-known brands. Pepsi’s product lineup includes not only its namesake Pepsi cola but also popular snack brands like Lay's, Doritos and Quaker Oats.
Why PEP Stock Is A Top Choice
PepsiCo has a long history of consistent growth and financial stability. The company's global presence and diverse portfolio of brands provides a steady revenue stream. PepsiCo has an impressive track record of increasing its dividend for 50 consecutive years. This consistent dividend growth, combined with the company's stable business model and strong cash flow from operations makes PepsiCo a top pick for a “safe” dividend stock.
2. Medtronic plc [MDT]
Business Overview
- Recent Share Price: $78.10
- Sector: Healthcare
- Dividend Yield: 3.6%
Medtronic develops, manufactures and sells a wide range of medical devices and therapeutics used in hospitals, clinics and homes worldwide. It is among the largest medical device companies in the world. They operate in several medical specialties including cardiology, neurology, diabetes and dialysis.
Why MDT Stock Is A Top Choice
Medtronic has a 10-year history of consecutive dividend growth, with a 45-year history of consecutive dividend payments. The company's diverse line across several healthcare sectors provides stable cash flows, even during economic downturns, as demand for medical products is less cyclical than other sectors. Medtronic's strong market position and record of innovation contributes to its financial stability and ability to maintain its dividend. It is currently trading at around 14x earnings, which is a good entry point for a high-yielding stock with a strong balance sheet.
3. Chevron [CVX]
Business Overview
- Recent Share Price: $157.77
- Sector: Energy
- Dividend Yield: 4.1%
Chevron is one of the world's largest integrated energy companies, engaged in exploration, production and transportation of crude oil and natural gas. It is also engaged in refining and distribution. Chevron also invests in renewable energy and advanced technologies, aiming to diversify its portfolio and adapt to the changing energy landscape.
Why CVX Stock Is A Top Choice
Chevron has a 36-year long history of both consecutive dividend payments, as well as dividend growth despite relative volatility within the energy sector. The company’s 2024 hike of nearly 8% came in February. CVX also has a history of share buybacks, which increases the overall value for current shareholders. While CVX has been flat on a trailing one-year basis, the company is well-positioned for projected increase in global energy demand, as it operates in both petroleum, as well as alternative energies.
4. Consolidated Edison [ED]
Business Overview
- Recent Share Price: $91.55
- Sector: Utilities
- Dividend Yield: 3.6%
Consolidated Edison, Inc. (ED), is one of the largest energy utilities in the United States, serving New York City and Westchester County. The company engages in the generation, transmission, and distribution of electricity, as well as the delivery of natural gas to millions of customers. ED also invests in renewable energy projects and energy efficiency programs.
Why ED Stock Is A Top Choice
ED is a regulated utility, which provides stable and predictable earnings regardless of economic conditions. The company has an impressive track record of increasing its dividend over several decades. ED provides essential services to a densely populated area, which contributes to its ability to maintain consistent cash flows and support its future dividend payments. With low debt levels, and a favorable dividend payout ratio at 60%, ED is a top pick for a safe dividend stock.
Bottom Line
With careful selection and diversification, high dividend stocks can be a valuable tool for long-term wealth building and income generation. For more reading on other stock ideas for 2024, check out this list of the best stocks for 2024.
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