Why settle for rock-bottom income returns when you can increase your dividend income fast with these stocks?
These are bountiful times for Corporate America, but when it comes to dividend income, shareholders may feel left out of the profit party.
Companies in the S&P 500 are on track to earn more than $1 trillion this year. Yet even with companies paying 32% of their profits in dividends — 37% above the average for the last 10 years — the yield on the broad index of U.S. stocks has been stuck at roughly 2% for years.
That’s less than half its historical yield of 4.4% and a reflection of rising stock prices over the past couple of years.
If you're investing for income, a 2% dividend won't take you very far, especially after accounting for inflation and taxes.
In fact, after a 15% tax rate for qualified dividends and inflation around 1.5% annually, the real dividend yield is closer to 1.6% for many investors.
Do you think your portfolio can meet investment goals on a 1.6% real dividend yield?
Do you think you could pay living expenses in retirement on a 1.6% cash return?
I love dividends and it’s one of the best forms of passive income investing but the average cash return on stocks just isn’t going to help you reach your financial goals.
Fortunately, there are ways to boost your dividend income. Some are long-term ideas to position in companies with increasing payouts while others offer the potential to jumpstart your investment income fast.
I’ve asked investing experts their favorite ways to boost dividend income and then picked the 15 best stocks in each category. The mix of different income investments and strategies will not only increase your cash returns but help to diversify your income portfolio.
First though, I wanted to share my favorite four stocks for monthly dividends and how I create consistent cash flow. Click to play the video here or watch it on YouTube. Don't forget to subscribe to the channel to get more videos like this one.
Don't over-reach for income
Before we get to those ways to boost dividend income and 15 income investments, I have to hit on the risk to a cash-focused strategy.
Most advisers don't recommend stretching for yield, taking more risk in return for more income. An attractive yield may not be the best way to generate total returns and dividend payers tend to be more defensive names, which aren't always good bets for price appreciation.
You have to think about dividend growth as well as a high immediate income.
Historically-low interest rates have forced many investors from fixed-income investments into the most popular dividend income stocks, pushing prices up and yields down. As the Fed raises rates, the shine could come off some of those names and prices could suffer as the money flows the other way.
High-yield stocks, notably utilities and real estate investment trusts (REITs), tumbled recently as interest rates spiked, making bonds and other fixed-income investments more competitive.
Overall, your portfolio should be tailored to your long-term investing objectives and focus on total returns with dividend investing strategies for safety and return. This means a mix of capital gains and income from a wide variety of sources.
That includes a mix of income investments including stocks, REITs, MLPs and other dividend-paying names.
Energy MLPs for High-Yield Tax Benefits
Master Limited Partnerships (MLPs) make money off fees charged for moving oil and gas through their pipelines or storage facilities. They're required to pay out more than 90% of their cash flows as distributions to investors and they currently yield 6% on average.
With domestic oil-and-gas production booming, MLPs should generate solid long-term return and they also offer a unique tax advantage. MLPs pass through their expenses and income to investors who only pay tax on a portion of the income return.
Part of the income yield you get from MLPs is taken off the price you paid for the investment while the remaining dividend is taxed immediately. That means you save on taxes versus dividend-paying stocks.
Many MLPs have hiked their distributions more than 10% over the last year as the price of crude rebounded and fundamentals improved in the energy sector.
MLP valuations remain reasonable compared to REITs and other yield investments. The investments do not move closely with stocks or bonds, adding a powerful level of diversification to your portfolio.
MLPs do have drawbacks. They're sensitive to interest rates and energy demand and the tax treatment can seem complicated at first. You will receive a schedule K-1 that will outline the expenses and income distribution for your taxes.
One way to capture much of the market is to buy the four biggest MLPs in the Alerian Index. Combined, they make up more than 45% of the index, driving a large share of its returns.
- Enterprise Products Partners (EPD)
- Plains All American Pipeline (PAA)
- Energy Transfer Partners (ETP)
- Magellan Midstream Partners (MMP)
Another option is the Alerian MLP index fund (AMLP) which invests broadly in 43 companies and pays an income yield of 7.5% annually. The downside is that the fund doesn’t provide the tax benefits of direct investment in the MLPs but also doesn’t have the complicated K-1 form.
Just getting started investing? Want to know more about one of the most popular investing strategies among investors?
Step-by-Step Dividend Investing is a beginner's guide to the best investments in dividend-paying companies and other income-producing investments. You'll learn why dividend stocks consistently beat the market and how to put together a rock-solid portfolio that will put cash in your pocket.
The New Tech Income Investments
Years ago, dividends were a rarity in Silicon Valley. Today, most large-cap tech stocks pay a dividend and tech companies in the S&P 500 are expected to grow dividends 17.4% in the next 12 months, the highest rate of any sector, according to FactSet Research.
Consider three of the biggest names in tech; Microsoft (MSFT), Cisco (CSCO) and Intel (INTC) with yields ranging from 2.3% to 3.5% annually.
Perhaps more compelling is their potential for dividend growth. The three companies pay out between 33% and 39% of their income as dividends. Those payout ratios are considered low, providing plenty of potential for dividend growth.
Craig at Retire Before Dad recommends dividend growth investing as a proven strategy for income investors. This involves buying stock in individual companies that have wide economic moats, solid management, and a history of paying an increasing the dividend every year.
Stock prices are difficult to predict, but dividend payments from good companies are very predictable. It's a reliable way to grow your passive income and help ignore market fluctuations.
Key risks: Volatility is a hallmark of technology stocks. They can rapidly lose their edge in the marketplace, and hardware companies are economically sensitive.
Financial services and Real Estate as Income Investments
Profits for banks and other financial companies have rebounded sharply, yet they're still paying out a meager share of their earnings as dividends. The sector paid out less than a third of its income as dividends last year according to FactSet, the lowest of any sector in the S&P 500.
One name to consider is CME Group (CME), the largest U.S. operator of options and futures exchanges. Revenues have been rising, in part thanks to heightened volatility around interest rates, and the company's clearing business is gaining market share.
The stock currently yields 2.3% but the company has a policy of paying out 50% of cash earnings and usually makes up the difference with a special dividend in December.
While Wells Fargo (WFC) saw its reputation tarnished over the last year, the banking giant is regarded for its superb customer service. The selloff in shares could be a buying opportunity in this best-in-class name in mortgage lending and consumer banking.
Real estate investment through REITs also presents attractive opportunities for income investors and an alternative to direct real estate investing. Real estate went through a once-in-a-lifetime downturn and even the strong gains over the last several years haven’t taken many names to overvalued territory.
Two names to consider are Ventas (VTR) and Extra Space Storage (EXR). Ventas owns properties in the health care space and should benefit from increased health care spending and the trend to an aging population. Extra Space Storage benefits from the non-cyclical nature of storage demand and relatively low costs to operate the real estate.
Barbara Friedberg of Barbara Friedberg Personal Finance likes the Vanguard REIT ETF (VNQ) which holds shares of 157 REITs in all property types and pays a 4.4% income yield.
For long-term income investing, she also recommends the dividend achievers, a group of stocks that have raised their dividends for at least ten consecutive years. Examples include the Vanguard Dividend Appreciation ETF (VIG). You'll get a decent yield from companies with a history of increasing dividends and possible principal share price appreciation as well.
Dividend income investors don’t have to sacrifice cash return after market’s run over the past several years. Investing across different types of income investments will not only help boost your income yield but will diversify the risk in your stock portfolio. Check out MLPs, REITs and stock sectors with strong dividend-paying companies to increase your cash return.
