Boost Your Portfolio Income with These Dividend Stocks

With interest rates so low on bank savings accounts and certificates of deposit, it makes sense that more people are looking to grow their portfolio income with dividend investing. More and more it seems like social security will not fully support us during our retirement years, so we need other types of income like dividends to help meet our financial obligations later in life.

The amount of portfolio income you need will vary depending on the specific circumstances of each investor, but we will discuss how to boost your portfolio with two of the best dividend stocks for passive income right now.

Maximizing portfolio income means more than just selecting stocks that pay a high dividend yield right now. Far too often a too-high dividend yield is a sign of danger. A high dividend yield, say over the 4% range, is an indication that the stock market believes that the dividend is not sustainable and in danger of being cut or eliminated.

In order to maximize passive income with dividend investing you need a plan to identify high quality stocks that are raising dividends on an annual basis. If those higher dividends are supported by growing earnings of the company, then you will likely have a winning stock in your dividend portfolio over the long run. Stocks with DRIP (Dividend Reinvestment Plans) are another great indication of quality as these dividends are automatically reinvested in the stock.

Building Your Portfolio Income with the Right Stocks

Here at Wealthplicity we have a five-step filter that we will use to select dividend stocks for a dividend portfolio. We will not recommend a dividend stock unless if meets ALL FIVE of the following criteria: 

1. The business needs to operate in an industry that is healthy and growing. We want to invest in industries that are seeing growth on a regular basis.
2. The business selected needs to be successful and growing. Not only do we want to invest in industries that are thriving, but we want to only invest in thriving businesses within those thriving industries. No penny stocks and no turnaround situations here, as that is too hard. We want to sleep well at night knowing that we’ve only invest in top notch, high quality stocks.
3. There needs to be a long-term track record of paying (and preferably growing) a dividend. Growing dividends need to be supported by growing profits of the business. When you find companies that value returning money to its shareholders in the form of rising dividends, you have got a winner on your hands as long as the profits of the company support the dividend.
4. The company needs to be run by a well-respected chief executive officer. With so many economic shocks in recent years you want a steady hand at the helm running the company. Look for a well-respected leader as the chief executive officer to guide the company through good times and bad.
5. The balance sheet needs to be healthy, with no more than a reasonable amount of long-term debt. Debt holders get paid before dividends are paid to common stockholders. Make sure the business is not too highly leveraged with debt, such that it will not be able to pay and grow its dividend.

A good place to begin research on investing in dividend stocks is to look at the list of dividend aristocrats and dividend kings. These are companies that have paid and increased their annual dividend consecutively for 25 years and 50 years, respectively.

Dividend paying stocks that can pay and increase their dividends to shareholders for that many consecutive years are certainly worthy of consideration. These kinds of dividend paying stocks show that the management team is committed to paying dividends and likely that the business generates the cash flow to support it.

But if you are investing in stocks that pay a dividend, the dividend aristocrats and dividend kings list is just a good place to start. There are many other high quality dividend paying stocks worthy of consideration.

Running the S&P index stocks through the above five filters eliminates quite a few rather quickly. As we sift through the few companies that meet all five of these criteria above, we want to highlight two of those that are the highest quality names to invest in right now.

Both highlighted companies are in the defense industry. Right now, stocks in this sector seem to be out of favor, which of course for the patient investor is a great time to pick up some shares, collect the dividends and watch the stock price rise over time.

Best Dividend Stocks for Passive Income

Northrop Grumman

Northrop Grumman (ticker NOC) is a defense contractor primarily specializing in aerospace products. They manufacture military aircraft, missile defense systems and satellites among other related products.

With various tensions throughout the world, defense spending in the United States and abroad is growing, and I do not see this changing any time soon.

Northrop Grumman is highly successful in defense circles, well known for providing high quality products. This is reflected in their financial results as they continue to grow revenues and profits quite nicely. And as a result, NOC is able to increase their dividends annually. Over the long run I would expect revenues to grow in revenues in the 6-8% range annually, and when combined with more efficient operations, would drive a profit increase in the 10-14% range.

And Northrop Grumman likes to share its success with its shareholder in the form of dividends. The current dividend yield for Northrop Grumman is a quite generous 1.94%. And they have increased their dividend payments for 12 consecutive years at an average rate of 13% a year. At that rate of dividend increase, the rate of dividend will double every 5.5 years.

Northrop Grumman is run by the well-respected chief executive officer Kathy Warden. She has been with the company since 2008 in various leadership roles and has been CEO for the last two years.

A look at Northrop Grumman’s balance sheet shows that their financial position is very strong. A balance sheet with $14 billion in long-term debt against a market capitalization of $50 billion, indicates that the company is in very good financial health.

General Dynamics

General Dynamics (ticker GD) is also a defense contractor that provides a wide range of defense products including nuclear submarines and Abrams tanks. They also make Gulfstream jets sold for civilian use.

We discussed above how the defense industry is thriving now, and we do not see that changing.

Like Northrup Grumman above, General Dynamics has a thriving business. Its high-quality brands will enable General Dynamics to grow its profits by at least 10% a year and much of this increase will be returned to shareholders in the form of higher dividend payments.

The General Dynamics stock currently yields a very generous 2.8%. They have increased their dividend for 30 consecutive years by an average of approximately 9% a year. So they are big believers in sharing their success with shareholders.

General Dynamics has been run by the well-respected chief executive officer Phebe Novakovic since 2013, so we are in good hands with her at the helm.

With only $10 billion in long term debt for a company with a $45 billion market capitalization, General Dynamics has a very strong balance sheet that will allow them to weather any storm the economic cycles will throw at them.

Summary

Boosting your portfolio income is important, especially the closer you get to retirement.

You can be confident building a stream of passive income with dividend investing but be careful how you pick your stocks.

Use our five step criteria to pick the best dividend stocks for passive income investing.

Use Northrop Grumman and General Dynamics discussed above as examples as you start your research.