There are many ways to create passive income. One popular way is through investing in dividend-paying stocks. With stock market volatility and below-average returns the past few years creating a challenge for investors, the idea of getting paid regular quarterly dividends from the stocks you own is especially appealing. For this article I’ll focus on using dividend stocks for passive income, and four of the best dividend stocks for the new year.
Dividend Stocks And Passive Income
Dividend stocks can be a core part of a passive income portfolio. Consistent dividend payments show a company’s stability and profitability, committed to paying their shareholders a portion of the profits year after year. And, by investing in stocks that pay consistent dividends, that passive income still has the same potential as any other stock to provide additional returns through price appreciation.
Understanding Dividend Stocks
Quality dividend stocks are normally found in companies that are well established. Not all stocks pay dividends. Dividend yield stocks usually pay their shareholders in cash, but dividends can also be paid in the form of stock. I’ll focus on cash dividends in this article.
There are always risks when investing in dividend stocks. Even the most established company can experience a down-turn, cut its dividends or quit paying them all together. Investors should also be aware that any company that seems to show an especially high dividend yield ratio should be examined closely. This could be because the company's stocks are dropping in value, making the dividend ratio higher than normal. That might indicate an undervalued stock, but could also be a sign of increasing risk to the underlying business that could ultimately put the regular dividend payment in jeopardy.
Leveraging Dividend Stocks For Passive Income
Dividend stocks create passive income by paying out regularly-scheduled dividends. U.S. stocks typically pay quarterly. If you prefer not to own individual stocks, you can consider investing in dividend-paying exchange-traded funds.
When creating an investment portfolio based on providing passive income, it is especially important to look at the payout ratio and profit margins of the company you’re considering investing in. A payout ratio close to, and especially above 100% is a red flag.
These companies are using almost all their profits to pay their shareholders or are borrowing money to pay the dividends. This is unsustainable and even if the dividend yield is high, not worth the risk in my opinion. Companies with too high a dividend ratio or too low a profit margin may be at greater risk of soon cutting or pausing their dividend payouts.
The brain trust at Forbes has run the numbers, conducted the research, and done the analysis to come up with some of the best places for you to make money in 2024. Download one of Forbes' most popular and widely anticipated reports, 12 Best Stocks To Buy for 2024.
Benefits Of Passive Income
There are many benefits to having a passive income stream. Since the investor receives passive income without actively working for it, passive income can be a helpful supplement income to have while working; for times when you cannot work (if injured, for example), or for extra income that you do not have to work extra hours for. Passive income becomes especially important to many investors during their retirement years.
Those who are financially able to shift income completely passive and not work for a living, as is the goal of many retirees, the benefits are obvious. More free time, freedom to relocate, not relying on a job, vacation time at will, no work-related stress, no commute, plenty of time to look after health, more time to spend with family, and time to devote to non-career projects.
The Best Dividend Stocks For Passive Income
Dividend yielding stocks, like any stocks, always have risk. In my view, the four I’ve selected for this list show good potential to weather the current market storm compared to the average stock and the broader stock market. They all have reasonable profit margins and payout ratios, signs that the company is doing well in spite of stock price volatility. These are also stocks with strong liquidity, but still inexpensive enough in terms of valuation, as evidenced by a reasonable price to sales ratio. Here’s the group of four I chose to focus on.
1. Polaris (PII)
- Industry: Recreational Vehicles/Consumer Cyclical
- Market cap: $5 billion
- Stock price: $90.34
- Revenue (ttm): $9 billion
- EPS: $10.37
- Dividend yield: 2.9%
- Gross profit margin: 22.7%
- Payout ratio: 24.7%
- Price to sales ratio: 0.6
- Price to free cash flow: 15
- Latest dividend amount: $0.65
- Dividend payment frequency: Quarterly
Company Overview
Polaris is an American automotive manufacturing company. Polaris is most well-known for the company’s snowmobiles, which it invented in 1954 and has been manufacturing ever since, along with many other ATVs and vehicle accessories. Since August of this year, PII stock has been declining in value, due at least in part to consumer caution. With cost of living, interest rates and inflation as high as they are right now, less consumers are willing to purchase a new recreational vehicle.
Why Polaris Is A Top Pick
Other than dividends (i.e. price change only), Polaris’s stock price is trading about where it was 10 years ago, after falling 35% since August. It is too good a company to not deserve a look.
2. Hormel Foods HRL
- Industry: Packaged Foods/Consumer Defensive
- Market cap: $17.7 billion
- Stock price: $32.60
- Revenue (ttm): $12.1 billion
- EPS: $1.46
- Dividend yield: 3.5%
- Gross profit margin: 16.5%
- Payout ratio: 74.7%
- Price to sales ratio: 1.5
- Price to free cash flow: 22.8
- Latest dividend amount: $0.28
- Dividend payment frequency: Quarterly
Company Overview
Hormel Foods is an American food packaging company, founded in 1891, which operates globally. The company has 50 brands, including Skippy, Dinty Moore, Spam, Jennie-O and Planters.
Why It Hormel Is A Top Pick
HRL’s fundamentals weakened earlier this year, but the third quarter brought some margin improvement. That was spurred by the slowing of inflation, which threatened to run much higher, but has now leveled off. HRL is delivering volume growth in each segment of the company.
3. Old Republic International ORI
- Industry: Insurance - Diversified/Financial Services
- Market cap: $7.8 Billion
- Stock price: $29.37
- Revenue (ttm): $7.7 billion
- EPS: $3.16
- Dividend yield: 3.3%
- Gross profit margin: 12.0%
- Payout ratio: 30.0%
- Price to sales ratio: 1.1
- Price to free cash flow: 9.9
- Latest dividend amount: $0.25
- Dividend payment frequency: Quarterly
Company Overview
Old Republic International is an insurance underwriter in the United States and Canada. The company was founded in 1923, became publicly traded in 1968, and is one of the nation's 50 largest shareholder-owned insurance businesses. ORI boasts 25 consecutive years of dividend growth, has paid a cash dividend without interruption since 1942 and has raised the annual cash dividend payout for each of the past 42 years.
Why Old Republic Is A Top Pick
ORI is part of an insurance stock group that is a rarity on Wall Street these days. Its price is in an uptrend that has lasted for more than just a few weeks. It bottomed last September, and recently reached an all-time high of $29.89 in price. However, that was only after returning zero above its dividends from 2007 through March 2023. So it might just be getting started
4. C.H. Robinson Worldwide (CHRW)
- Integrated Freight & Logistics/Industrials
- Market cap: $b10.2 illion
- Stock price: $87.34
- Revenue (ttm): $18.4 billion
- EPS: $3.29
- Dividend yield: 2.8%
- Gross profit margin: 6.6%
- Payout ratio: 73.8%
- Earnings yield: 4.1%
- Price to sales ratio: 0.6
- Price to free cash flow: 7.7
- Latest dividend amount: $0.61
- Dividend payout frequency: Quarterly
Company Overview
C.H. Robinson Worldwide is an American freight and transportation company that operates worldwide. The company was founded in 1905 and offers land, sea and air freight as well as warehouse storage. CHRW has distributed increased dividends (in dollars per share) for 25 consecutive years, from $0.015 in 1998 to $0.61 in 2023.
Why C.H. Robinson Is A Top Pick
In 2023 the global freight markets faced challenges due to weak demand, high inventories, and excess capacity. This has created more competition in the market and driven down the cost of shares. A recession next year would be an additional hurdle, but we are focusing on the long term and CHRW is the type of sustainable business that makes the cut for this list.
Methodology Used
To choose these dividend stocks, I started with the SPDR Portfolio S&P 500 High Dividend ETF (SPYD
Passive Income Tax Considerations
Dividends are taxable income. The rate at which they are taxed depends on your income, filing status and whether the dividend is classified as “ordinary” or “qualified.” Ordinary dividends are taxed the same way as ordinary income and qualified dividends are taxed as capital gains. In 2023, the tax-rate for qualified dividends is 0%, 15% or 20%. Ordinary dividends pay between 10% and 37% tax. For both ordinary and qualified dividends, the tax rate is dependent on income and filing status.
In order to be classified as a “qualified” dividend, there are certain criteria the stock must meet: The company must be a U.S. company (or a qualified international company) and the investor must hold the stock for a minimum amount of time. All four of the stocks in this list would be considered qualified if held for a sufficient length of time.
Bottom Line
In today’s financial market, there is no perfect stock with low risk and high rewards. These four stocks, from different sectors of the market are companies with a solid track record of dividend payouts and reasonable profit margins for the passive income investor to consider now.
Read Next
- 10 Best Stocks for 2024
- 10 Best ETFs for 2024
- 10 Best Value Stocks for 2024
The brain trust at Forbes has run the numbers, conducted the research, and done the analysis to come up with some of the best places for you to make money in 2024. Download one of Forbes' most popular and widely anticipated reports, 12 Best Stocks To Buy for 2024.
