Investing in the stock market is something most people do at some time in their life.
Truth is, most of us hate the waiting game that the stock market really is...
You invest your money and wait five, 10, 20 years for any kind of substantial return.
But what if you could invest in stocks and get paid every three months for each stock you own? Well, that’s actually a simple process — invest in stocks that pay shareholders dividends.
Essentially, dividends are a way to pay shareholders back for their investments.
What's the difference between stocks that don't pay dividends and those that do?
Simply put, stocks that provide dividends are usually companies that are established and have a product that historically does well. Stocks that don't pay dividends are often emerging companies that want to have rapid business growth, and so instead of giving money directly back to the shareholder, they invest it further into their company so that the shares eventually become more valuable.
Types of Dividends
There are two kinds of dividends that can be provided to the stockholder.
Cash dividends, where you're paid directly by the company you hold stock in. This is good for ready money, but it does lower the value of the company by whatever percentage was paid out, and this will drop the overall value of your stock. You will also have to pay taxes on whatever was paid out to you, but cash dividends do provide a regular source of income.
Stock dividends are dividend payments in the form of shares rather than cash. So for each share you hold, you'd receive a set amount depending on the payout. You can always sell some of these new shares and essentially turn your shares into a cash dividend.
Remember: You do not have to pay taxes on the new shares you get, which is one reason many people think share dividends are they way to go.
To make this decision even easier, many companies have what’s called a dividend reinvestment plan, or DRIP: this option allows for shareholders to automatically use their cash dividends to buy more shares, or even partial shares, as soon as the dividend is paid. Essentially, it turns cash into shares without you ever having to lift a finger, and because you’re gaining more shares every month, the dividend grows every month as well.
Getting the Biggest Payout
Much like with traditional stocks, some dividends are better than others.
So how do you figure out which company has the strongest dividend that will keep paying you for years to come?
Well, dividend histories are very good, very simple measures of dividend strength. If a company has a long record of stable, or even increasing dividend payouts, it’s likely that the company puts those payouts high on its priority list and will continue to do so in the future.
For younger companies with a less illustrious dividend history, dividend strength can be measured using the dividend coverage ratio. This divides a company’s net income by the dividend payout (the entire amount, not the per-share amount).
This will tell you if the company’s income covers its payouts, or if it’s losing money—and value—every time it pays its investors. The higher the ratio the better.
From there, look at the size of the yield itself: what portion of profits is the company paying out? Keep in mind that a company that could afford a much bigger payout and isn’t doing it is probably putting that money back into its own operations, meaning a much better long-term outlook.
Finding the best dividend stocks on the market starts with these two things: a long history, and strong financials.
Oil and Gas Dividends
Some of the best stocks that are providing big dividends right now are oil stocks.
As one of the longest-standing industries in the world, it’s no wonder some of its biggest players have some of the best payouts today.
Now, even though the oil industry has had a really rough time over the last few years — prices hit highs of $115 a barrel in 2014, then plummeted to just $26 a barrel in February of 2016 — the sector is finally moving away from the bottom.
More importantly, demand hasn't suffered. The world is consuming more and more crude every day.
That isn't going to subside anytime soon — possibly not for decades!
So where do you start looking?
Here are three dividend-paying oil stocks to help kick-start your search...
Exxon Mobil Corp. (NYSE: XOM)
ExxonMobil is the largest oil and gas company in the world, with a market cap of over $338 billion. It increased its dividend payments in 2016 to $2.92 per share, up from $2.88 in 2015 (3.50% yield). The company has a history of increasing its dividends annually and has operations in every part of oil and gas development, with over 35,000 gross operated wells.
ExxonMobil is a company that will stay strong even through the ups and downs of oil and gas prices. It was founded in 1870 and is headquartered in Irving, Texas.
Chevron Corporation (NYSE: CVX)
Chevron is the second largest oil and gas company behind Exxon, with a market cap of $215 billion. It has one of the best histories of dividend payments, increasing them continually over the past 27 years, even through many boom and bust oil cycles, committing to increasing the dividend payments through tough financial times.
Chevron’s diversity has helped it stay afloat for many years, and through 2016 it had a dividend yield of about 4.5%. It was founded in 1879 and is headquartered in San Ramon, California.
ConocoPhillips Co (NYSE: COP)
COP explores for, produces, transports, and markets crude oil and natural gases worldwide. It has maintained or increased dividend payments since 2002. Even when oil prices dropped along with COP’s value (causing the company to make cutbacks), it still made dividend payments its top priority and actually increased the payments in 2014 and 2015. Its dividend yield was about 5.5% at the end of 2015, and though it cut that dividend in 2016 to focus on building the business back up during the recovery, it's already working to increase the payouts once more.
ConocoPhillips is a solid pick, as the company obviously puts dividends high on its priority list. It was founded in 1917 and is headquartered in Houston, Texas.
Energy and Capital