Investing in high dividend-yielding stocks can be an excellent strategy for building a passive income portfolio and generating returns with capital appreciation. Companies that pay dividends are rewarding their stockholders with cash payments.
What Are Dividend Stocks?
Dividend stocks are shares in a company that receives regular distributions of a company’s earnings through cash payments to shareholders, called dividends. Dividends are an incentive to keep shareholders interested in a company’s stock and reward shareholders for their ownership. Dividends are often paid quarterly or annually.
Investors in dividend-paying stocks usually count on dividends as part of their passive income strategy. As a result, dividend-paying stocks are often shares in more mature companies with well-established businesses that can make regular cash payments to their shareholders without disrupting company operations. These companies are usually large market capitalization companies and are considered lower-risk investments.
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What Is Dividend Yield?
A dividend yield is considered one of the best and fastest ways to determine the quality of a dividend-paying stock. It is calculated by dividing the stock's annual dividend by its current stock price.
A stock's dividend yield is a popular metric because it normalizes dividends across many companies, offering an easy comparison method. Comparability allows investors to rank potential investments quickly. As a result, dividend yield is popular among investors, online brokers, and stock analysts.
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7 High Yielding Dividend Stocks
In the table below is a list of seven high dividend-yielding stocks based in the United States. The table ranks companies by annual dividend yield in descending order.
| Company Name | Ticker Symbol | Dividend Yield |
| Walgreens Boot Alliance | WBA | 10.31% |
| Verizon Communications Inc. | VZ | 6.61% |
| AT&T | T | 4.29% |
| Pfizer | PFE | 6.74% |
| Pioneer Natural Resources Co. | PXD | 5.43% |
| Dow Inc. | DOW | 7.24% |
| Philip Morris International | PM | 3.59% |
Financial data as of February 17, 2025, and this information is intended only for informational purposes only.
How to Invest in Dividend Stocks
Investing in dividend-paying stocks is a cornerstone of any investment portfolio. The allocation in your portfolio to public equities should match your investing strategy and long-term financial planning. Dividend stocks should make up a percentage of your equity exposures because they provide opportunities to earn passive income and capital appreciation.
Here are five steps on how to get started investing in dividend-paying stocks:
1. Select an Online Broker
Gone are the days of calling your broker and placing your stock purchase via telephone. Although some investors still execute orders like this, most stock purchases are placed via online broker portals.
The movement to online trading has expanded access, speed, and research capabilities for the average retail investor. If you already have an online broker, that is a great place to begin analyzing dividend-paying stocks.
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2. Analyze Dividend-Paying Stocks
Conducting a thorough due diligence process is critical to investing successfully for the long term. Knowing why and where you invest gives you the information to make more informed investment decisions. Clarity of investment keeps you ahead of the competition.
There are multiple metrics to analyze before choosing an investment in a dividend-paying stock, including:
Dividend per share is the annualized dividends paid per each share of capital stock. Dividend per share is calculated by dividing the total amount of dividends paid out over a period, usually annually, by the number of outstanding shares. Dividend per share allows investors to compare dividend policies across different companies.
A company’s dividend payout ratio is the proportion of dividends relative to a company’s net income. This analysis shows you whether a company is currently pushing itself too much to make dividend payments and its likelihood of being able to make dividend payments in the future.
If the dividend payment is too high relative to its net income, then that may be a sign the company cannot withstand a market downturn, increasing the probability that it may miss a dividend payment in the future.
Smart Tip:
Companies with a dividend payout ratio of less than 80% are considered healthier investments and can be relied on in your passive income strategy.
Not all dividends are created equal. A group of companies in the S&P 500 have a unique quality about them – they have been growing their dividend payments year over year for over 25 years in a row. These companies are known as dividend aristocrats.
Investors seeking consistent, high-quality, and growing dividend payments should research dividend aristocrats. As one of the favorite investments of the passive income investor, these companies issue high-quality dividends
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Another group of companies, dubbed Dividend Kings, has been paying dividends for over 50 consecutive years. These companies are not all listed on the S&P 500 but can be an excellent income source for your passive income portfolio.
3. Select a Stock
As discussed above, dividend yield is only one investment analytic to consider. When making an investment decision, it is critical to ensure the individual investment aligns with your long-term investment strategy, and you should take a holistic view before deciding what investment to select.
You can determine what analytics you consider the most important, such as dividend yield, and begin filtering companies that match your investment objectives. Online brokers have built-in reach platforms that allow you to conduct your research, and we have provided some high-yielding dividend stocks above, which can be a great starting point.
4. Purchase The Stock
With your investment framework in mind and research conducted, it is time to select a stock to purchase. Whether you want the highest-yielding dividend stock or a consistently paying stock (like a dividend aristocrat), the next step is selecting how much of your portfolio to invest in dividend-paying stocks. Portfolio allocation can change depending on your investment goals.
With a particular stock in mind, you must decide whether to purchase an individual stock or a Dividend Exchange Traded Fund (ETF).
The final step is to place your order, and your online broker will execute the transaction.
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5. Monitor Your Return
Once you have invested in a stock, regularly monitor the performance of the stock and dividend policy. Is the company still performing as you thought it would? Is the company paying out dividends as anticipated? Is the company changing its dividend policy?
Regularly monitoring your investments on a quarterly, semi-annual, or annual basis will allow you to keep a pulse on your portfolio without turning into a day trader (which may be too much time spent on investment research and analysis for the average investor).
Dividend Stocks and Dividend Funds
There are two primary ways to invest for dividends: buying individual stocks or dividend funds. There are significant differences between both options. Here are five key differences.
1. Who Does the Investing
When analyzing individual stocks in your online brokerage, it can take significant time and effort to determine what investment would be a perfect fit for your portfolio. Most investors don’t have the time for thorough investment due diligence.
That is where a dividend fund can make a lot of financial sense. Whether it is a dividend mutual fund or a dividend Exchange-Traded Fund (ETF), the fund is managed by professional portfolio managers. These portfolio managers analyze thousands of stocks and make investment decisions in alignment with that specific fund’s objectives. You can choose to piggyback on this effort by investing in a dividend fund.
2. Diversification
Every investment in equities contains a certain degree of risk. This investment risk is balanced with the reward of future earnings.
Investing in individual dividend-paying stocks is riskier than investing in a dividend fund because your investment is beholden to one company’s performance. However, funds diversify their investments by investing in a group, or basket, of stocks that produce dividends. When one stock underperforms in a fund, it can be buoyed by another stock. If you invest in a single stock, you are subject to single company exposures.
3. Investment Yield
Investing in individual stocks can produce higher returns than investing in a dividend fund. As an individual investor, you can create your own portfolio of higher-yielding stocks. Depending on your risk appetite, you can set your investment parameters. For example, you could invest in the highest-yielding companies with dividend yields above 5% and ignore the length and consistency of dividend payments.
Dividend funds offer more structure and defined investment parameters. Because they are more diverse, sometimes containing hundreds of investments, their dividend yields are a weighted average of the fund’s investments. This approach trades diversification for yield.
4. Taxes
Taxes on investments can significantly affect portfolio returns. Understanding how taxes impact your portfolio can save you thousands of dollars. Dividend payments have different tax treatments based on whether they meet the IRS definition of an ordinary or qualified dividend.
- Ordinary dividends are reported to the IRS as earned income, while qualified dividend payments are classified as capital gains. Tax treatment gives qualified dividends a tremendous tax advantage because, for the tax year 2023, the highest qualified dividends can be taxed at 20%, while ordinary income can be taxed at 37%.
Read More: Capital Gains Taxes Rates for 2025
- Qualified dividends are taxed as long-term capital gains. As a result, you pay a lower tax rate on qualified dividend income than earned income. Qualified dividends are paid by a U.S.-based company or a qualifying foreign company, and you must hold the stock for 60 days in the 121 days before the ex-dividend date.[1]
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Dividends are not taxable income events if the investments are in a tax-deferred retirement account, such as a Roth IRA, Traditional IRA, or 401(k) plan.
Individual stock dividend payments can have different tax treatments than dividend funds because individuals have more control over when and how often they invest in dividend-paying stocks. If you buy and hold dividend-paying stocks, the dividends will likely be classified as qualified.
Mutual funds are required to distribute all net profits, including capital gains, to shareholders each year. These distributions are reported on Form 1099-DIV. Additionally, if your mutual fund buys and sells investments in dividend-paying stocks, your distributions are more likely to be classified as ordinary income.
5. Fees
If you invest in individual high-yielding stocks, commission fees are the only fees you must pay. As a long-term focused investor, these expenses should be relatively low and non-recurring.
When you invest in a dividend fund, however, the fund charges investors for managing and curating the portfolio and other fund administrative expenses. These fees are known as the fund’s expense ratio. Before distributions are received by investors, a fund’s investment returns are reduced by the expense ratio.
Smart Summary
Investing in dividend-paying stocks by buying individual stocks or investing in a dividend mutual fund or ETF can be an excellent source of recurring passive income and capital appreciation for your portfolio. When investing for the long term, investing in dividends can be the fuel to take your earnings to the next level.
(1) Internal Revenue Service. Investment Income and Expenses. Last Accessed February 16, 2025.
