High Dividend Stocks: How To Find and Trade Them in 5 Simple Steps


Who doesn’t want to earn extra income on stocks?

High dividend stocks offer you the chance to grow your account and enjoy continuing rewards thanks to regular dividend payouts.

Because you can count on cash distributions as opposed to monitoring percentages of your portfolio, dividend stocks are generally seen as an effective and reliable way to build your account.

This post gives you an introduction to high dividend stocks, including what they are, how they work, and what considerations to keep in mind to ensure that you make the most intelligent choices when choosing stocks.

Download the key points of this post as PDF.

What Are High Dividend Stocks?

Before you can understand what a high dividend stock is, you need to understand the general concept of dividends.

What is a Dividend?

A dividend is a payment issued by a company or corporation to shareholders. It might be issued as cash (referred to as “cash dividends”) or as stock (referred to as “stock dividends”).

Typically, dividends are paid out quarterly, but sometimes they may be issued in response to stand-alone events such as a big merger.

The value of dividend payments is figured out by something called a yield. In the context of the stock market, yield is a way of measuring the dividend relative to the share price.

Quite a few big companies offer dividends. Why? Since large-cap companies tend to be stable, their stock prices don’t move a ton. Dividends are a nice perk to offer to entice and retain shareholders. It’s their way of showing they notice and appreciate you.

As the shareholder, it’s kind of like you’re receiving a little bonus based on the company’s profits. Usually, dividends are part of a long-term plan for investing, where individuals reinvest the dividends into the same company and get to enjoy larger dividends as a result.

Defining High Dividend Stocks

High dividend stocks are just what they sound like: stocks that offer a higher rate of return with their dividends.

There isn’t one official rate or dividend yield that is considered the cutoff for high versus low dividend stocks. This is partially because it’s relative to the market. For instance, what might be considered a high yield today might have seemed very low a decade or two ago.

At the time of this writing, most financial articles and investors would probably say that 4% or greater would be considered a high yield, though some might include 3% and some might say 5% or higher.

To get a better idea, you can view a list of the highest dividend stocks on the NASDAQ to see what’s available.

However, you shouldn’t just be drawn to the stocks with the highest dividends! If a stock has a super-high dividend, it’s typically a riskier investment. Yes, the dividends are higher, but so’s the risk level.

Stocks aren’t the only option for high dividends, either. You can also explore high dividend exchange traded funds (ETFs), which offer a different type of investment and the chance to diversify.

Benefits of Trading High Dividend Stocks

Why trade high dividend stocks? Here are some of the reasons you might be tempted:

  • Regular payouts. When you trade high dividend stocks, you’re banking on the fact that you’ll receive a payment on a regular basis.
    Dividends are usually (but not always) issued on a quarterly basis, so this means that at reliable intervals, you’ll receive a payout that you can save, reinvest in the same company, or use for other investments.
  • Potential to outperform the market. With high dividend stocks, you have the potential to make the most of your trading dollars. High dividend stocks have the potential to outperform the market, but only if you’re smart about it.
    The key here is to be ahead of the trend. You’re probably not going to make waves in your account by going with a low-yield yet stable company stock. That may be reliable, but it won’t grow your account fast.
    High dividend stocks are riskier, but offer the potential for better returns. Be sure to look at the company, do fundamental and technical research, and look at their earnings reports and balance sheets.
    Consider why the yield is so high. Sometimes, a good company can have a bad patch. If the market conditions or short-term company issues have made the stock price decline, it can raise the yield.
    If you’re proactive and your research tells you that things may level out soon, you can stand to benefit from trading a high dividend stock.
  • Tax efficient. Yes, you have to pay taxes on dividend income. But depending on the dividend, the tax rates might be lower than on other types of investment income. How do you know?
    There are two types of dividends: qualified and nonqualified. It’s the qualified ones that are taxed at the lower rates. For a dividend to be qualified, it needs to do two things. First, it has to be issued by a U.S. corporation, a corporation in a U.S. territory or U.S. possession, or a foreign corporation that is on a U.S. stock exchange. You also have to make sure that you’ve held the stock long enough. You have to have had the stock paying the dividend for more than 60 days within a 121-day holding period. All of that can get confusing, so suffice it to say that you should check with your accountant about the rules before assuming you’ll get a great rate.
  • Take advantage of low interest rates. Stocks with dividends are often affected by interest rates, which can affect the underlying businesses in question. If interest rates are high, dividends are less enticing.
  • Compounding. Compounding is the term used to describe using your dividends to reinvest in the same company, which leads to more dividends.

When to Buy High Dividend Stocks

There’s a time for everything. So … when should you invest in a high dividend stock? Here are some things to consider when timing out a trade:

Are the interest rates low? As mentioned above, interest rates have an effect on dividends. So if interest rates are low, it can be a good indicator that now is a good time to be looking for dividend stocks.

Have you done your research? Since high dividend stocks carry a similarly high level of risk, you’ll want to devote plenty of time to research your choices before executing a market order.

Seriously, do the research. It’s worth the time. If you want to be in a position to benefit from high dividend stocks, you can’t skimp on your research. If you haven’t thought out potential investments and tried to get ahead of the curve, you have no business trading high dividend stocks.

January Effect

While it might sound like something the Weather Channel invented to attract viewers, the January effect is actually a seasonal stock market phenomenon.

The January effect refers to the reliable increase in stock prices at the start of the year. This might seem backward since most people are winding down with spending following the holidays. But remember: that’s in retail. In the stock market, things follow a different cycle.

In December, when most people are spending at the mall, investors are selling so that they can maximize the losses on their tax returns.

In recent years that has been changing somewhat as more and more people are using tax-sheltered retirement plans, but it’s still a common enough phenomenon.

Also, plenty of people have cash bonuses they received at the end of the year that they are putting into the market come January.

Small- and micro-cap companies are more affected than mid-/large-/mega-cap companies because the former are more liquid.

Be sure to poke around the market starting in the early winter months and see how high dividend stocks are performing. It can be a good time to seek out deals before the big buying time in January!

How to Invest in High Dividend Stocks

OK, so you’re intrigued. But if you want to learn how to invest in dividend stocks, what should you do next? Here are some of my tips for the next proactive steps you can take in seeking out prospective high dividend stocks:

Use a Stock Screener to Find High Dividend Stocks

If you want to seek out the top dividend stocks, you’ll need to sift through the many options that are available.

A stock screener can be immensely helpful in this regard. StocksToTrade is my favorite stock trading and research platform (I even helped design it!), which can be used to filter by dividend to narrow down the choices.

By cross-referencing the short list with other fundamental and technical indicators, you can begin to narrow down a list of the top dividend stocks to consider.

Consistent Profits Drive Growth

Ultimately, consistent profits drive growth, both for a company and for its dividends.

When seeking out high dividend stocks, you need to identify companies that either are profitable or that you think will be profitable.

A stock that has a higher-than-average dividend may be a bigger risk than one with a smaller dividend. So it’s your job to figure out how consistent the company is, and if it has the potential for increased profits.

If the profits are dodgy and inconsistent, the company probably isn’t a good choice, no matter how high the yield.

Avoid Companies with Excessive Debt

This falls under common sense but bears mention. If you are looking to benefit from dividends, the company needs to be making profits. A company with excessive debt isn’t a good contender.

A company’s debt level may not be immediately evident simply by virtue of how much money they earn. Determining their debt requires a little bit more digging.

You’ll want to pay attention to a section in the earnings report called “Defaults Upon Senior Securities.” Here’s what it’s all about …

In this part of the report, the SEC declares that “If there has been any material default in the payment of principal, interest, a sinking or purchase fund installment, or any other material default not cured within 30 days, with respect to any indebtedness of the registrant or any of its significant subsidiaries, identify the indebtedness and state the nature of the default.”

By poking around this section of the report, you can better suss out what their debt situation is. Some debt is normal for a large company — but if it’s a chronic condition, avoid it like the plague.

Analyze the Stock Sector

If you start filtering stocks that offer a 4% or higher yield with their dividends, chances are you’ll start to notice some trends in the types of companies offering them.

Typically, high yields are usually offered by the same usual suspects. Energy, utilities, consumer products, and real estate are common. Some sectors, like tech stocks, are uncommon.

While some might say this is a bad thing because it doesn’t invite diversification, on the other hand, it allows you to focus.

By recognizing that high dividend stocks are inherent to certain sectors, you can set your sights and research time on those specific sectors so that you can narrow down your choices in a more streamlined way.

You can also use this information to intelligently choose stocks that are not currently high dividend stocks.

For instance, if there’s a stock in a traditionally high dividend sector that has a great potential for growth, a lower dividend now might not be so bad. If you get in early, you’ll have room to grow.

Earnings Reports

Repeat after me: Earnings reports are your new BFF when you’re researching high dividend stocks.

When evaluating high dividend stocks, a thorough review of company earnings reports can better help you determine the best choices to suit your style.

Earnings reports are filed quarterly and are made public. They offer great information about the company’s overall performance and direction.

The quarterly earnings report gives you access to information like the company’s net income, net sales, earnings from operations, and the EPS (earnings per share).

The earnings report also offers up financial statements such as the income statement, balance sheet, and cash flow statement.

There’s more: The report also gives you the ability to perform a side-by-side comparison of the company’s most recent quarter versus quarters past.

The earnings report in and of itself can actually have an effect on the company’s stock price. Usually, this isn’t just because of what the company is reporting, but what they’re projecting for the future.

The report includes projections, and frequently, analysts also weigh in. This means that the earnings report is closely scrutinized not only for its reporting but for what it means for the company moving forward.

If a company doesn’t meet the earnings report projections, it can have a negative effect on the stock price. On the other hand, if it meets or exceeds them, it can have a positive effect, which can make for great stock momentum.

When should you look for an earnings report? Usually, there’s a window of time following the close of the quarter when companies release their reports; it’s called “earnings season.” Contact the company to learn when it will release its earnings report.

Be proactive! Don’t just wait for the report to come out, because you want to make sure you have an edge.

Earnings Guidance

Need more guidance? In the earnings report, you can also gain insight by reviewing sections like the one called Quantitative and Qualitative Disclosures About Market Risk.

Companies are required by the SEC to share disclosures about potential market risk. This can act as guidance to things that might create volatility for the company’s stocks.

Some common disclosure methods might include:

  • Information that can help determine the future cash flow, such as upcoming contracts or company events.
  • Analysis of potential value loss for the company based on market changes (for example, higher or lower interest rates).
  • Analysis of potential losses based on moves in the market.

This information can help you figure out some of the best- and worst-case scenarios for the company. Using this data, you’ll gain insight into potential future risk.

P/E Ratio

Before you execute a market order, be sure to figure out and consider the company’s P/E ratio.

The price-earnings ratio (P/E ratio) is a ratio that you can use to value a company. It’s calculated by measuring the current share price against its earnings per share.

This ratio helps you determine the dollar amount you need to invest in a given company to receive a dollar of their earnings.

Generally, a high P/E ratio is seen as a good thing. Many growth stocks are characterized by a high P/E Ratio due to the expectation that the company will be growing at a fast rate.

To calculate the P/E ratio, simply divide the market value per share by the earnings per share. Boom. Done.

Technical Analysis and Chart Patterns

Before investing in high dividend stocks, bring all of your research elements together by performing thorough technical analysis and reviewing stock patterns.

You already know this if you’re a frequent reader of this blog, but there are two key types of stock analysis.

One is fundamental analysis, which is where you research the business that is offering the stock.

Reviewing the earnings report is part of your fundamental research, but you should also round it out by doing some fact checking and reviewing press releases or news regarding the company.

Fundamental analysis is extremely important. But ultimately, what will prove your hypothesis about a company is the cold, hard facts. This is where the second type, technical analysis, comes into play.

To perform technical analysis, you’ll use a trading platform like StocksToTrade to comb over a stock’s specific price action over time. By looking at how a stock has performed in the past, you can get a good picture of how it might perform in the future.

If you look at a stock’s chart over time and see patterns emerging, this can be a very positive sign that they will repeat again.

This data-based approach can help you look at potential trades from place of fact-based knowledge versus a gut feeling.

Develop Your Own High Dividend Stock Watchlist

Your time is valuable, so you shouldn’t waste your energy on stocks that aren’t worth your consideration.

But how can you make a short list of high dividend stocks to watch and monitor so that you can pounce on them when the time is right?

That’s easy: Make a watchlist, or a short list of potential high dividend stocks that you’re considering trading.

This list is composed of stocks that you’ve deemed worthy of your consideration. You keep a watchful eye on these stocks to see if they meet certain criteria that will make you want to enter a trader.

Often, you’ll be looking at things like volume, breakouts or breakdowns, or any change in the moving average.

Obviously, if you want to trade high dividend stocks, your watchlist should be composed of high dividend stocks. So how do you go about it?

Everyone ultimately develops their own technique for making a watchlist, but here’s a suggestion for how you can get started …

First, narrow down your choices. Start by filtering on high dividend stocks, perhaps in a particular sector you’ve decided to focus on.

Next, look at trading volume. My star student Tim Grittani** looks for stocks that are up 10 percent or more, with at a volume of at least 300,000 shares.

From this point, you’ve narrowed it down to a watchlist. You can monitor all or some of the ones on your list, really digging into their earnings reports and performing detailed technical analysis.

Are there any evident patterns, or is there some sort of a catalyst that looks promising?

Once you’ve narrowed down your watchlist, you’ll at this point have a few strong contenders for a trade. From here, it’s a matter of watching and waiting.

Keep a spreadsheet for your watchlist so that you can track the stocks in question. Review them frequently so that you don’t miss any important moves. This way, when opportunity presents itself, you’ll be ready.

Is a stock worthy of your watchlist? Here are some things to ask yourself:

  • Does it meet my criteria?
  • Have I had success with this pattern before?
  • Is there enough volatility?
  • What direction is the stock moving?

Want to become a watchlist whiz kid? Watch this video.

Don’t Trust Stock Promoters

I’m telling you this so you don’t have to learn it the hard way: No matter how compelling their story is, don’t trust stock promoters.

Trading is risky, and if you want to find safe stocks to invest in, you can only put your trust in your own best practices and research.

Oh, it can be tempting to listen to the loudest voice in the room. And sure, it’s great to look at other traders’ watchlists and to look at what companies and promoters say.

But never, ever execute a trade based on someone else’s word. You’ll never be able to get it right all of the time, but you’re more likely to get it right when you’ve prepared by doing your own thorough research.

Improve Your Trading Skills with Seasoned Mentors

As you read through these steps to finding and trading high dividend stocks, it can all start to seem overwhelming.

Trading classes can be immensely helpful in bringing you up to speed.

Sure, you could develop skills and learn things slowly and the hard way. But you could speed up the process and improve your trading prowess by proactively pursuing an education.

Many traders see a huge improvement in their technique (and an uptick in their potential for profiting) when they seek out professional assistance.

Trading Challenge

You’re not average, and your trading education shouldn’t be, either …

In my Trading Challenge, I focus on teaching my students the basics, but I don’t stop there. Ultimately, I want them to learn how to think for themselves as traders.

To help my students learn and grow, I offer plenty of resources like webinars, video lessons, and watchlists and commentary.

But I’m also trading right alongside them, with a small account. I urge my students to get active in their trading as they learn, and I’m there to act as their mentor and support as they grow.

The Bottom Line

Dividend stocks have long been part of the trader’s repertoire, with reliable payouts that can help fund new investments. High dividend stocks allow you to take advantage of the benefits of dividends but at an accelerated rate.

However, like any other high-reward trading method, it comes with a heightened level of risk. This makes it all the more important to perform fundamental and technical research and to carefully review the options before executing market orders.

Have you traded high dividend stocks? How did it go? Leave a comment below and let me know.