Dividend-paying stocks are the type of stocks that pays you to hold them, just like a rental property providing a rental income.
Every investor should have some part of their portfolio invested in these types of stocks so that you don’t have to completely rely on capital gains to make money in the markets, and on a side note, who doesn’t like steady extra income!
In today’s blog, we’ll be discussing our list of the 5 best dividend stocks to hold in 2021, along with the exact strategy on when to buy them, how long to hold them for, and how much you can make by adding how much of the shares. So let’s dive right in.
What is a Dividend And Why Companies Pay Them?
Dividends are a part of a company’s earnings that the company distributes to its investors or shareholders as an appreciation for buying and holding onto their stock.
But not all companies pay dividends. Does that mean only good or bad companies pay dividends? No!
A dividend is paid mainly for two reasons. First, the company wants its shareholders to hold on to their stock because the more shareholders a company has, the larger is its market cap.
Also, paying out dividends signals high confidence for future growth and it is a demonstration of a company’s financial strength too. So that’s another reason why companies pay dividends.
Ok, so enough knowledge on dividends for now. Let’s move on to our list of best dividend stocks for 2021.
The 5 best dividend stocks
The list we’re giving you today is not merely based on who has the highest dividend payouts or who has the highest dividend yield, but our focus is on stocks that have both huge capital gain potential and still pay the highest of dividends. So let’s begin.
#5: IBM (IBM)
Of course, one of the most recognized companies in the tech industry with a high dividend yield of 5.52% has to be on the list.
IBM’s current share price is around $124, which means for every stock that you buy, you’ll receive a dividend of $1.70 every quarter. That means buying 10 shares of IBM now will give you a $68 yearly dividend income. Similarly, 100 shares will bring in $680 per year.
Now that may not seem a lot in comparison to what some other stocks may pay, however, the reason why IBM is still on the list is because the company is fundamentally good, and the stock may be undervalued right now. That means it has the potential to give good returns in the future.
So if the stock is fundamentally good and undervalued too, why is it still at the 5th spot on our list? Well, It is for the simple reason that IBM is pretty volatile as compared to other stocks on the list, and the market sentiment is also not bullish on the stock, which is obviously not good.
#4: 3M (MMM)
Another well-known company, 3M, is on the 4th spot on our list. It has a market cap of $92 billion with a dividend yield of 3.67%, which translates into nearly $1.46 of earnings per share per quarter.
Yes, the dividend yield is quite lower than that of IBM but 3M is still at the 4th position because the stock is way less volatile than IBM, and its growth potential is actually way higher.
Another point in favor of 3M is that its stock price appears to be undervalued while the market sentiment on the stock is bullish, which makes it a better bet even in the short term. All this makes 3M a better buy than IBM even with a lower dividend yield.
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#3: AbbVie (ABBV)
At 3rd position is a healthcare stock, AbbVie. It has a market cap of $152 billion with a dividend yield of 5.49%, which roughly translates into earnings of $1.41 per share per quarter.
Which is again lower than both the stocks below this on the list. Does that mean we’re moving backward in the list? Obviously not. There are some reasons why it is placed third and not the fourth or fifth.
AbbVie has a higher growth potential than both IBM and 3M, meaning it can outperform both of them in terms of capital gains. Also, the dividend yield is much higher than that of 3M, which means if the price of AbbVie goes up, technically you’ll receive even higher dividends than 3M.
#3 (Tied): AT&T (T)
Tied at #3 is AT&T. While the dividend yield of AT&T is much higher than all three stocks discussed till now at 7.42%, you’ll still receive lower dividends because of the simple reason that the stock price of AT&T is way undervalued.
With the current price of AT&T, your earnings per share would be only $0.50 per share per quarter, but the lower price has its advantage too. You can buy a much higher quantity of AT&T by investing the same amount of money as compared to a stock like 3M, which is nearly 6 times as expensive.
One catch with AT&T is that it’s not as good as a growth company and might underperform in terms of capital gains.
#2 Realty Income (O)
Till now, all the stock that we discussed above pays a dividend on a quarterly basis. Realty income is a Real Estate Investment Trust (REIT) that pays you on a monthly basis, which is why it is placed second on our list of best dividend stocks.
With a nice dividend yield of 4.78%, you’ll be getting paid $0.23 per month per share. Doesn’t seem like much? Well, let’s compare it with owning actual real estate and getting rental income every month.
Let’s say that instead of investing $20000 in real estate, you buy 333 shares of Realty income at $60 and hold it for the next 10 years. Now assume that the stock price only goes up to just $100 in those 10 years. Even in that scenario, you’ll be doubling your money and sitting on a gain of $22000.
#1 (Tied): Blackstone Mortgage Trust (BMXT) & Starwood Property Trust (STWD)
Another tie between two trusts, Blackstone Mortgage Trust with an astonishing dividend yield of 11.49% and Starwood Property Trust with an even more astonishing yield of 12.91%. Sounds amazing, right?
Both the stocks seem undervalued in their price, meaning they have the potential to return some good capital gains in the upcoming years.
This means not only you’re getting a generous dividend payout, but you might also see some nice growth in your portfolio if you invest in these stocks.
So to conclude, all the stocks mentioned here are great and have their own positives and negatives, you can make the decision on whether you want to add any of them to your portfolio or not based on your financial goals, risk management, and time horizon.
