Top Dividend Stocks for March 2023

This month’s list of top dividend stocks consists of real estate investment trusts (REIT) like Annaly Capital Management Inc. (NLY) and energy companies like Pioneer Natural Resources Company (PXD).

Dividend-paying companies tend to be well-established, with stable earnings and a track record of distributing a portion of them to shareholders in the form of cash or additional stock. REITs are consistently among the top dividend stocks because they are required to pay out the majority of their earnings to shareholders.

One useful measure to gauge the sustainability of a company’s dividend payments is the dividend payout ratio (DPR), which measures total dividends divided by net income. It tells investors how much of the company’s net income is being paid to shareholders in the form of dividends compared with how much the company is retaining to invest in further growth.

If the ratio exceeds 100% or is negative (meaning net income is negative), the company may be borrowing to pay dividends. In these cases, the dividends are at a relatively greater risk of being cut. While dividend stocks are known for the regularity of their payments, they may be cut to preserve cash in difficult times.

Dividend stocks, as measured by the S&P 500 Dividend Aristocrats Index, have fallen 1.6% in the past year compared with the 8% decline of the Russell 1000 Index.

Below, we look at the top five dividend stocks in the Russell 1000 by forward dividend yield, excluding companies with payout ratios that are either negative or in excess of 100%.

These market performance numbers and all statistics below are as of Feb. 22, 2022.

• Forward Dividend Yield: 17%
• Payout Ratio: 88%
• Price: $21.24
• Market Cap: $10.5 billion
• 1-Year Total Return: -10.52%

Annaly Capital Management Inc. is a diversified capital management company that operates as a real estate investment trust. It has investments across the mortgage finance industry. Its investment portfolio includes agency mortgage-backed securities (MBS), residential real estate, and mortgage servicing rights.

• Forward Dividend Yield: 12%
• Payout Ratio: 81%
• Price: $205.27
• Market Cap: $48.8 billion
• 1-Year Total Return: 1.7%

Pioneer Natural Resources is an independent oil and natural gas exploration company. It produces oil, gas, and natural gas liquids (NGLs) within the Midland Basin in Texas. On Feb. 22, the company upped its quarterly dividend 21% to $5.58 per share from $4.61 the prior quarter.

• Forward Dividend Yield: 11%
• Payout Ratio: 58%
• Price: $9.23
• Market Cap: $4.4 billion
• 1-Year Total Return: -12.55%

Rithm Capital, formerly known as New Residential Investment Corp., is a public REIT investing in the residential housing sector. The company’s portfolio includes mortgage-servicing-related assets, residential loans, non-agency securities, and similar investments. The company announced the change in its name and stock ticker in June 2022.

• Forward Dividend Yield: 11%
• Payout Ratio: 53%
• Price: $23.26
• Market Cap: $18.3 billion
• 1-Year Total Return: 12.61%

Coterra Energy explores, develops, and produces oil, gas, and natural gas liquids products. Operations are located in the Marcellus Shale, Permian Basin, and Anadarko Basin.

• Forward Dividend Yield: 10%
• Payout Ratio: 71%
• Price: $19.43
• Market Cap: $6 billion
• 1-Year Total Return: -10.71%

Starwood Property Trust is a REIT that originates mortgages and invests in commercial and residential properties. In January the trust paid a dividend of $0.48 per share to shareholders of record as of Dec. 30.

3 Ratios Used to Analyze Dividend Stocks

Dividend Yield: This ratio measures the annual value of dividends received relative to a security’s per share market value. Investors calculate the dividend yield by dividing the annual dividend per share by the current stock price.

For example, if company XZY issues a dividend of $10 annually with a current share price of $100, it has a dividend yield of 10% ($10 / $100 = 10%). Those seeking high-yielding stocks can start their search by screening for issues with a divided yield above a certain percentage. Bear in mind that there are many other factors besides dividend yield that investors should consider before investing in a stock.

Dividend Payout Ratio: The DPR measures how much of a company’s earnings are paid out to shareholders. Investors calculate the ratio by dividing total dividends by net income.

For instance, if company XZY reported a net income of $50,000 and paid $15,000 in annual dividends, it would have a DRP of 30% ($15,000 / $50,000 = 30%). This means the company pays out 30% of its earnings to shareholders. Generally, a company that pays out less than 50% of its net earnings in dividends is considered stable and has the potential for sustainable long-term earnings growth.

Dividend Coverage Ratio: This ratio measures the number of times a company can pay dividends to its shareholders. Investors calculate the dividend coverage ratio by dividing a company’s annual earnings per share (EPS) by its annual dividend per share.

For example, if company XZY reported $10 million in net income with an annual dividend of $2 million to shareholders, it has a dividend coverage ratio of 5 times ($10 million / $2 million). Typically, investors view a higher dividend coverage ratio as more favorable.

Advantages of Dividend Stocks

Two key advantages of investing in dividend stocks include generating a passive income and dividend reinvestment.

Passive Income: Companies that pay dividends typically issue them quarterly, creating a reliable stream of passive income that investors can spend how they please. Dividends also have the added advantage of offsetting share price depreciation.

Dividend Reinvestment: Investors can reinvest dividends they receive back into the company to acquire more shares. This is called a dividend reinvestment plan (DRIP). Participating in a DRIP allows the investor to take advantage of compounding returns—a strategy to build long-term wealth.

Do Your Dividend Stock Research

A high yield is just one of several aspects to consider when investing in dividend stocks. A higher-than-average yield can signal trouble if a struggling company is paying large dividend amounts in an effort to attract investors.

In addition to dividend yield, be sure to take a good look at the following data as well.

• Payout ratio: A payout ratio of 35% to 55% is considered healthy because a company that distributes up to half of its earnings as dividends is likely to be a good performer and an industry leader. Importantly, it’s reinvesting a good share of its earnings back into itself for growth.
• Dividend increases: A solid history of increasing dividends is welcome news because it indicates that a company has had the financial wherewithal and desire through good economic times and bad to keep paying its shareholders, and to raise the amount it pays.
• Dependable revenue and earnings growth: Over time, the more stable, the better. An occasional erratic result might not raise eyebrows but anything else may signal a company in trouble.
• Solid market share and competitive advantages: These can help companies maintain their ability to be excellent performers. Such advantages might be intellectual property, advanced technology, high barriers to entry, and a highly recognizable and respected brand name.

The Bottom Line

Dividend yield compares the income a company pays shareholders to the price of that stock. It’s calculated by dividing the annual dividend amount (the amount of income paid throughout a year) by the stock’s price. While a high dividend yield may be appealing, it doesn’t necessarily mean a stock is a smart investment.

Dividend yield is one tool to use to screen for dividend stocks that are potentially worth owning. Overly high dividend yields may indicate that a company is struggling. Likewise, companies with extremely high payout ratios can also signal danger to investors.

Before investing your money, invest some time in looking for companies that are financially healthy enough to sustain and potentially grow their dividends, and continue to offer an attractive dividend yield.

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