Personal Finance

3 Top Dividend Stocks for Different Types of Investors

Eggs Brown Getty

There are several reasons for investors to favor dividend-paying stocks. A primary one is that reinvesting dividends can turbocharge long-term returns, thanks to the amazing power of compounding. In fact, dividend payers have been shown to outperform non-dividend payers over the long term. Moreover, dividend payers can be a great fit for those who want or need current income.

Some dividend-paying stocks are better suited for certain investors than are others. If you're interested in dividend-paying stocks, at least one of these three stocks might be a good fit for you: Realty Income Corp. (NYSE: O) , Cal-Maine Foods (NASDAQ: CALM) , or American Water Works Company (NYSE: AWK) .

These stocks -- which are quite different -- share two key commonalities:

  • All should be immune to negative effects from Brexit, or Britain voting to leave the EU, as none have operations outside the U.S. and its territories.
  • All have significantly outperformed the broader market over the five- and 10-year periods. (Cal-Maine's return has lagged the S&P 500's over the one-year period.)
Eggs Brown Getty

Image source: Getty Images.

Cal-Maine Foods: A play on the "cage-free" egg trend

Dividend yield Yielding 4% currently and 5.5% over the trailing 12 months; pays a variable quarterly dividend based upon net income.
Type of investor suited for Investors comfortable with some volatility that want the potential for significant capital appreciation and don't need a steady dividend.

Cal-Maine is not only the largest producer of shell eggs in the U.S., but it's also the only publicly traded pure-play egg company. This makes it the only play on the "cage-free" egg trend, one of the biggest food trends now underway. Currently, the vast majority -- estimates are as high as 90% -- of egg-laying hens in the U.S. are raised in extremely cramped cages. Just about every large company that buys eggs for resale to consumers (such as grocery stores) or to produce food products (such as restaurant chains) has pledged to fully switch to buying cage-free eggs within a certain time period -- mostly by 2020.

Cal-Maine stock isn't for those who want a steady dividend. The company's financial results can be volatile because they're considerably affected by the price of shell eggs, a factor outside its control. So, it wisely pays a variable dividend. In each quarter that it reports a net income, it pays a dividend of one-third of the quarterly income. In the last few years, the trailing-12-month yield has ranged from just over 1% to its current 5.5%.

This stock, however, could be a great choice for investors who don't care if the quarterly dividend size varies -- or could be nil -- and are comfortable with some volatility. Cal-Maine's size means that it should be able to scale up more quickly than others to meet the growing demand for cage-free eggs by acquiring and/or developing the necessary additional infrastructure to house the hens that will lay these golden eggs.

Water Little Girl Drinking From Water Fountain

American Water Works: The country's water utility giant

Dividend yield Yields 1.7%; trailing-12-month yield was about 2.5% a year ago, but the stock's rocketing up to deliver a total return of 72.7% over the last year has lowered the yield.
Type of investor suited for Investors who value safety and long-term capital appreciation potential more so than current income.

American Water Works is the largest investor-owned water and wastewater utility in the U.S. It operates in 47 U.S. states and Ontario, Canada, and as a regulated utility in 16 of these states. The company's industry-leading size provides it with the opportunity for growth via acquisitions in the extremely fragmented industry. Its core regulated business gives it a predictable income stream, while its market-based business provides the potential to generate revenue with higher profit margins.

The company has increased its dividend every year since it went public in 2008, with its 10% dividend hike in April marking the fourth consecutive year of double-digit dividend increases. Its dividend yield has always been among the lowest in the water utility group -- which speaks to its conservative bent. Currently, American Water Work's dividend payout ratio (dividends paid to net income) is 51.1%, whereas the industry's Nos. 2 and 3 players in the U.S. by market cap and revenue, Aqua America and American States Water , have payout ratios of 60.3% and 55.9%, respectively.

The stock's torrid price run-up over the last year has largely been fueled by investors' flight to safety amid what's been a tough stock market coupled with a very low interest rate environment. It isn't justified by American Water Works' financial performance or outlook, so there could be some choppy seas over the shorter term. However, smoother sailing should be on the longer-term horizon. American Water Works is in the right business: Fresh water is the most essential product we humans need to live and demand for it is predicted to increase, which should provide the country's largest player with muscle when dealing with industry regulators.

The best way for most investors to handle what they believe to be an overvalued stock is to dollar-cost average into a full position, rather than plunking down their entire investment amount at once. This, in fact, is a good strategy across the board.

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Beth McKenna has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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