- 1High yield alone doesn't make a good dividend stock — sustainability matters
- 2Look for payout ratios below 60% and consistent dividend growth
- 3Dividend Aristocrats (25+ years of increases) provide reliability
- 4Dividend stocks work best in taxable accounts with qualified dividend rates
- 5Our factor model helps identify quality dividend payers through profitability and stability scores
#What Makes a Great Dividend Stock?
A great dividend stock isn't just one with a high yield. It's a company that:
- 1Pays a meaningful yield — above the S&P 500 average (~1.4%)
- 2Grows the dividend consistently — annual increases, ideally 5%+
- 3Has a sustainable payout ratio — not paying out more than it earns
- 4Generates strong free cash flow — dividends need to be funded by real cash
- 5Has a competitive advantage — durable business model that protects future dividends
#Finding Dividend Stocks With Factor Analysis
While we don't have a dedicated "dividend factor," our existing factors are excellent at identifying quality dividend payers:
Profitability Factor
Companies with high margins and ROE tend to generate the excess cash needed for dividends. Our profitability score naturally surfaces consistent dividend payers.
Stability Factor
Low-volatility, low-leverage companies are more likely to maintain and grow their dividends through economic cycles.
Value Factor
The best dividend investments are those paying attractive yields at reasonable valuations. Our value score helps avoid overpaying for yield.
#Dividend Yield: The Basics
Dividend Yield = Annual Dividend Per Share ÷ Stock Price
Deep dive: Dividend Yield Explained →
| Yield | Typical Profile |
|---|---|
| 0–1% | Growth companies, token dividends |
| 1–3% | S&P 500 average, blue chips |
| 3–5% | Strong income stocks |
| 5–7% | High-yield, higher risk |
| 7%+ | Likely unsustainable — possible yield trap |
#Dividend Sustainability Metrics
Payout Ratio
Dividends ÷ Earnings
- Below 40%: Very conservative, room to grow
- 40–60%: Healthy and sustainable
- 60–80%: Elevated, growth may slow
- Above 80%: Risky — little margin for error
Free Cash Flow Payout
Dividends ÷ Free Cash Flow
More important than earnings payout because FCF measures actual cash available.
Debt/Equity
Heavily indebted companies may need to cut dividends to service debt. Low leverage = safer dividends.
#Sectors for Dividend Investing
| Sector | Avg. Yield | Dividend Reliability |
|---|---|---|
| Utilities | 3–4% | Very High — regulated cash flows |
| Consumer Staples | 2–3% | High — essential products |
| REITs | 3–6% | High — required to pay 90% of income |
| Healthcare | 1.5–2.5% | Moderate-High — pharma is reliable |
| Financials | 2–4% | Moderate — cycle-dependent |
| Energy | 2–6% | Moderate — commodity-linked |
| Technology | 0.5–1.5% | Growing — more tech paying dividends |
#Dividend Growth vs. High Yield
Two competing strategies:
High Yield Strategy
Buy the highest-yielding stocks for maximum current income. Risk: yield traps.
Dividend Growth Strategy
Buy stocks with moderate yields (2–3%) but 8–12% annual dividend growth. Over 10+ years, your yield on cost exceeds high-yield stocks, plus you get capital appreciation.
The math: A stock yielding 2% growing dividends at 10% annually will yield 5.2% on your original cost in 10 years and 13.4% in 20 years.
#Finding the Best Dividend Stocks
Use our rankings to identify stocks with: - High profitability scores (can afford dividends) - High stability scores (likely to maintain dividends) - Reasonable value scores (not overpaying)
Filter for stocks in traditionally high-dividend sectors, then verify individual dividend metrics on each stock's detail page.
Last updated: February 6, 2026