For many parents, the idea of investing can feel intimidating. Between work, soccer practices, and endless laundry, who has time to monitor the stock market?

Dividend investing is a great way to create passive income. You didn’t have to work overtime or start a time-consuming side hustle. It’s extra money coming in because you made a smart investment.

At the end of today’s article you’ll find a list of dividend stocks with the highest dividend yield, but I wouldn’t choose a dividend stock strictly on its dividend yield.

Choose companies you believe in.

Three of my top dividend stocks include Apple (AAPL), Microsoft (MSFT), and Intuit (INTU).

Yes, their dividend yields are tiny.

Yes, it will take much more money to get a larger dividend return.

But, I trust they’re positioned for the long term and continue growing in value.

Alight, off my soap box. Let’s dive in.

What is Dividend Investing?

At its core, dividend investing involves buying shares in companies that regularly pay out a portion of their profits to shareholders—these payments are known as dividends.

Why do companies choose to pay dividends in the first place?

For established companies with steady profits, paying dividends is a way to reward their shareholders and maintain investor interest. Companies that consistently pay dividends are often seen as stable and reliable, which can attract more investors.

Additionally, for companies that might not have many growth opportunities, returning profits to shareholders through dividends is a way to provide value, especially when reinvesting those profits back into the business wouldn’t generate significant returns.

Think of dividend-paying companies as mature, well-established players in the market—like Johnson & Johnson (JNJ) or Procter & Gamble (PG).

These companies have been around for decades, they’ve likely already captured a large market share, and now, instead of reinvesting all their profits into expansion, they share a slice of their earnings with you, the shareholder.

Let’s look at an example:

As I’m writing this, Coca-Cola (KO)’s stock is valued at ~$71 per share, with a dividend yield of 2.72%. This means that for every $100 of shares I own, I’ll receive $2.72 annually.

At the current share price, the quarterly dividend is estimated at $0.49.

I realize getting $0.49 per quarter for each share isn’t flip-off your boss today and walk out money. But it is a great way to build wealth over time.

If you zoom out, you’ll see that Coca-Cola (KO) stock has increased over time.

If you’ve held this stock for years, not only have you been receiving dividend payments, but the value of each stock increased over time. That’s a win-win.

One extreme example to show how this works at scale:

It’s well known that Warren Buffett loves Coca-Cola, both the drink and the stock. It’s reported he owns 400 million shares.

At a payout of $0.49 per share each quarter, you can estimate $784 million in annual earnings on the holding.

Pros & Cons of Dividend Investing

Dividend investing isn’t just about making money—it’s about creating financial stability for your family.

Here’s why it can be a game-changer:

Steady Income Stream: Dividends provide a consistent income stream that you can count on, whether you’re saving for college tuition, summer camp, or just trying to keep up with the rising cost of groceries. It’s like getting a bonus check every quarter without doing any extra work.
Compound Returns: One of the smartest moves you can make with your dividend income is to reinvest it. By purchasing more shares with your dividends, you’re effectively compounding your returns—your dividends earn dividends, creating a snowball effect that can significantly boost your wealth over time. Think of it as planting a tree that not only grows but also produces seeds for more trees.
Lower Volatility: Dividend-paying stocks are often less volatile than their non-dividend-paying counterparts. This can offer peace of mind, especially during market downturns. While your growth stock investments might take a hit during tough economic times, your dividend stocks will continue to pay you, providing some financial cushioning.

Imagine this scenario: The market has a rough year, and your growth stocks are in the red.

But your dividend stocks? They’re still paying out, helping you weather the storm without having to sell off your assets at a loss.

And a few risks to consider…

Dividend Cuts: Even well-established companies can reduce or eliminate dividends during tough financial times. This can significantly impact your income stream if you rely on these payments.
Market Volatility: Dividend-paying stocks are generally less volatile than growth stocks, but they are not immune to market downturns. A decline in stock price can reduce the overall value of your portfolio, even if dividends continue to be paid.
Growth Tradeoff: Dividend stocks typically offer lower capital appreciation compared to growth stocks. While you earn regular income, you might miss out on the higher potential returns that growth stocks can provide.
High Yield, High Risk: A high dividend yield can sometimes indicate financial trouble within a company, such as a falling stock price or an unsustainable payout ratio. It’s crucial to look beyond the yield and assess the company’s overall financial health.
Inflation Risk: If inflation rises faster than your dividend income, your purchasing power could decrease, making it harder to meet your financial goals.

Understanding these risks and taking steps to mitigate them—such as diversifying your portfolio and regularly reviewing your investments—can help ensure that your dividend investing strategy remains sound and aligned with your financial goals.

How to Get Started with Dividend Investing

You can start dividend investing in less than 5 minutes, even faster if you’re already logged into your favorite investing app. Simply log in, find a company offering dividends, and click buy.

Obviously it takes more than that to choose a solid portfolio, but you get my point. Lightening fast to get started.

The first thing you need to do is research. Begin by looking for companies with a solid track record of paying dividends consistently.

These companies are often found in sectors like consumer staples, healthcare, and utilities—areas that are less volatile and provide essential services.

For example, companies like Johnson & Johnson, Coca-Cola, and Procter & Gamble have been paying and increasing their dividends for decades, making them reliable choices for income-focused investors.

Why research matters

It should go without saying, but anytime you’re investing your hard-earned money, you need to take the time to do research. If you don’t understand the business or industry you’re investing in (at least on a basic level, I wouldn’t invest.

As part of your research, keep a close eye on the dividend yield. The dividend yield will tell you how much income you’ll earn relative to the stock price.

Diversify, diversify, diversify! As with all investments, diversification is key to reducing risk. Spread your investments across different sectors to protect your income stream. For instance, you might invest in a mix of consumer goods companies, utility providers, and healthcare firms. This way, if one sector underperforms, your entire portfolio isn’t affected.

If you’re new to investing, start small. Many brokerages allow you to buy fractional shares, so you don’t need a large amount of money to begin. Automating your investments can also be a game-changer. Set up automatic contributions to your investment account, so you’re consistently building your portfolio without having to remember to do it.

Highest Return Dividend Stocks

After some quick research, I found the list of the top dividend stocks by dividend yield from Investopedia below.

Chart created using Investopedia findings

I haven’t personally invested in the below but have them on my research list to dig into their business fundamentals a bit more before investing.

A Final Thought: Investing Strategy

As with all investment approaches, it’s critical to have a strategy to make sure you can optimize your return and stay on track when times get a bit rough.

Here’s how I approach dividend investing:

Set Financial Goals: I start with my financial goals. For me, it’s retirement. But it can be anything. Are you looking to cover specific expenses, such as your mortgage or your kids’ extracurricular activities? Saving for a vacation? Your goals will shape your investment strategy, helping you decide whether to reinvest dividends for growth or take them as income.
Reinvest Dividends for Compounding Growth: If you don’t need the money right away, I would reinvest your dividends. This puts your portfolio on autopilot and will harness the power of compounding. Pro tip - keep dividend stocks in your Roth IRA or 401k to minimize short-term tax impact.
Monitor and Adjust Your Portfolio: While dividend investing is relatively low-maintenance, it’s important to check in on your portfolio periodically. Depending on the company, I review annually and look for any red flags (ex. company cutting its dividend).

Ultimately, dividend investing is more than just an investing strategy—it’s a way to achieve financial peace of mind.

By putting your money to work for you, you’re taking a proactive step towards ensuring your family’s financial stability, allowing you to focus on what truly matters: spending quality time with your loved ones and watching your investments grow alongside your family’s future.

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Dividend Investing Explained: What is Dividend Investing And 10 Stocks to Consider in 2024