How to Find the Best Dividend Stocks, Step by Step

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The Social Security Administration recently announced the biggest increase to monthly benefit payments in about 40 years, nearly 6%.

That’s got to be great news for Social Security recipients, especially considering that over the prior 10 years, no annual increase exceeded 3.6%. For 2016, there was no increase at all.

That highlights one of the toughest things about retirement: creating an income that keeps ahead of inflation.

But Social Security isn’t the only game in town. There are other ways to achieve growing retirement income. Example? Dividend stocks.

If you’re not familiar with companies that pay dividends, you should be. Dividends are simply a share of a company’s profits, typically paid out to stock shareholders every three months.

While there are no guarantees, some companies have been paying dividends for decades without missing a beat, as well as increasing their dividends every year.

Take 3M, the industrial conglomerate, for instance. It has increased its regular dividend every year for more than 50 years. In 1989, 3M was paying about 33 cents a share. Last year? $5.88 a share. That’s a compound annual growth rate of 10% over that timespan — way better than Social Security has delivered.

And, dividends, unlike the pathetic interest you earn at the bank, can get favorable income tax treatment. Rather than rates as high as 37%, qualified stock dividends are taxed at a rate from 0% to a maximum of 20%.

So now you see what attracts income investors to dividend stocks: a tax-advantaged retirement income that has the potential to increase over time.

And here’s more icing on the cake: It’s not just your return that can rise. Your principal, meaning your initial investment, can also rise. In 1989, 3M was going for about $20 a share. Now it’s more than $180. No bank account produces growth like that.

Of course, there’s no free lunch. There’s always risk when investing in any stock, no matter how high the quality. To minimize that risk, you’ve got to learn some fundamentals.

That’s what this week’s “Money!” podcast is about. We’re going to talk about how to find the best dividend stocks, step by step. And we’re going to do it without making your eyes glaze over.

As usual, my co-host will be financial journalist Miranda Marquit. Listening in and sometimes contributing is producer and novice investor Aaron Freeman.

Sit back, relax and listen to this week’s “Money!” podcast:

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Show notes

Want more information? Check out these resources:

• 7 of the Best Dividend Stocks to Help Fund Your Retirement
• U.S. News & World Report: 15 of the Best Dividend Stocks to Buy for 2021
• Kiplinger: 65 Best Dividend Stocks You Can Count On
• Kiplinger: 15 Dividend Kings for Decades of Dividend Growth
• Kiplinger: 13 Dividend Aristocrats You Can Buy at a Discount
• NerdWallet: 25 High-Dividend Stocks and How to Invest in Them
• Stacy’s stock portfolio
• Subscribe to the Money Talks News newsletter
• Take our course The Only Retirement Guide You'll Ever Need
• Take our course Money Made Simple
• Miranda Marquit’s website