Whether investors are mainly looking for a reliable dividend or simply a high profit distribution makes a lot of difference.
Investors have a choice of roughly three types of dividend stocks. We list them for you.
1. Dividendaristocraten
Investors who don’t want to take too much risk but still want to invest in stocks should consider dividend aristocrats. These are companies that almost always make money, even in times of a corona crisis, internet bubble or war.
In order to qualify as a dividend aristocrat, a company must meet high standards. In Europe, a company must increase the dividend for at least ten years in a row and in the United States even at least 25 years.
Dividend aristocrats thus have a strong track record and for investors seeking dividends, such stocks are a fairly defensive choice.
Often these are companies that are not very popular in today’s society. Many companies are active in the arms, liquor or tobacco trade or in the oil and gas sector. Those who opt for dividend aristocrats had better be aware of that.
As a rule, they are also expensive stocks, so the actual dividend yield is not very high. That is the price for long-term certainty.
2. High Yield Stocks
High yield dividend stocks carry a significantly higher risk. With these types of shares, the market is not sure that a company can continue to pay out profits, for example because the company is experiencing a lot of headwinds. The share price is therefore under pressure, resulting in a high dividend yield.
Market commentator Arend Jan Kamp points in the IEX InvestorsPodcast for example on the KPN share, which offered a dividend yield of 11% a few years ago. “The entire market knew that KPN would stop paying dividends, it was no longer tenable,” said Kamp. “And that’s what happened.”
Two years ago, Shell decided to significantly reduce its profit distribution as a result of the uncertainties caused by the corona crisis. “That caused a lot of damage and a lot of skewed eyes among investors,” says Kamp.
High dividend yields are often found in weaker companies, noted IEX equity analyst Niels Koerts. “Many providers of retail real estate have a high dividend yield, but that is a sector you don’t want to invest in right now,” says Koerts.
Energy companies also offer a high dividend yield. “These companies are doing well at the moment.”
3. Dividend Growth Stocks
Finally, there are the stocks that increase their dividend enormously in a short period of time. Kamp of IEX points to ASML. “The dividend is going up there.”
Such companies often prosper and that is why it is possible. The disadvantage of this type of stock is that the strong growth of the company is often priced into the price. ASML stock has gone bankrupt several times in the past five years. The dividend yield is therefore very low.
Also read: Dividend stocks as protection against inflation
Justin Doornekamp is a freelance editor at Participaties.nl. Justin Doornekamp can take positions on the financial markets. The information in this column is not intended as professional investment advice or as a recommendation to make certain investments. Your reaction to the author is welcome.
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