Last updated: 14 Aug, 2021 | 04:35 pm
Dividend stocks provide investors with a regular stream of income and also potential long-term growth. Companies in India as well as overseas pay dividends to their shareholders. Focusing on the bestdividend stocks in the USA can help you with your investment decisions.
US stocks dividends can become a part of all income investor portfolios regardless of the investor's age and financial status.
Introduction to Dividends
Dividends are the profits that a company shares with its shareholders. Companies distribute their gains to the shareholders at regular intervals, usually quarterly; this is one way for investors to earn returns on their investment.
All companies do not pay dividends. If you want to receive regular income from your stock investments, you might want to choose from the list of high dividend-yielding US stocks for your investment.
Dividends are cash in your pocket. Unlike the share price that fluctuates daily, they are guaranteed once the company commits to paying a dividend. They are a way for you to participate in business growth.
How Are Dividends Calculated?
Decisions regarding dividend payouts are at the discretion of a company’s Board of Directors. They decide whether to pay the dividends annually, quarterly, or not at all. The payout depends on the net income and the free cash flow available to the company.
Some companies have a regular dividend policy. For this, they need to have enough net income consistently to support the dividend payout. Some companies may choose to share profits with the shareholders only when they believe it benefits the company and shareholders. Companies may choose different approaches to calculating and paying the dividend.
A company uses the Dividend Yield Method when it wants to increase market capitalization and shareholder satisfaction. The company sets a target yield and, based on that, declares the dividend.
The Dividend Discount Model is based on the fundamental concept that a company's value depends on the present value of its dividends. Companies use this approach when they want to achieve a healthy valuation by increasing their stock prices.
Capital-intensive companies will not have a steady dividend payout as they have to plow back a significant proportion of their earnings to remain operational. They follow the Growth and Retention Ratio approach. These companies will not be the best dividend-paying stocks in the US but will benefit the investors through a rapid increase in share value. These companies have a growth ratio to maintain and payout the dividend based on a surplus that they may have.
Benefits of Availing Dividends
Dividend payout benefits both the company and the shareholder. From a company's perspective, the benefits are:
For an investor also dividend payouts are beneficial owing to the following reasons:
Taxation on Dividends
Dividends received by an Indian shareholder on shares of foreign companies are taxed as per the applicable tax rates in India. The payouts that you receive are added to your current income.
US tax laws mandate withholding tax for non-US residents at a rate of 30% on payments of US source stock dividends. However, India has a Double Taxation Avoidance Agreement (DTAA) with the US, which allows you to offset your tax liability in India against the US stock dividend withholding tax. Owing to the DTAA, the tax on dividends from stocks of US companies is a flat 25% and not 30%. When you invest in a stock in the US, you might receive a dividend from the company. This amount is taxable at the rate of flat 25%.
If you own stocks of a US company, dividend tax on US stocks is taxed on a net basis after claiming the deduction of interest expenditure made to earn that income. The interest expenditure deducted will not exceed 20% of the total dividend income. No additional deduction is allowed under Section 57 for any other expenses like commission or payments to a banker or any other intermediary to receive the dividend.
If a US-based company declares a dividend of $10, you will receive $7.5. However, your tax liability in India is calculated at $10. If your tax liability in India is $3, since you have already paid $2.5 in the US, you will have to pay only $.0.5 in India.
The above is just a basic example; the actual calculation will depend on your taxable income and the applicable tax slab.
Highest Paying Dividend Stocks in the US
The Dividend Aristocrats Index, maintained by S&P Indices, is a collection of the best US dividend stocks. Several companies that have increased their dividends for at least 25 consecutive years are a part of this list. Every company in the index gave investors raises, not only during the good times but also during the downturns. Some of the companies included in this list are:
P&G has increased its dividend consistently for 64 years. They own a host of powerful brands that people regularly use, irrespective of how the economy is performing.
Coca-Cola has increased its dividend for 59 consecutive years. They are the parent company for many juices and bottled water brands, which gives them a broader base of operations.
It is a real estate investment trust that invests in single-tenant retail properties. They are a recent addition to the Dividend Aristocrats and joined the index in January 2020. They have increased their dividend for 25 consecutive years.
They have increased their dividend for nearly 58 years in a row. They own a portfolio of strong brands that have massive acceptance and reach.
Target is another company that sells everyday necessities apart from non-essentials. They have increased their dividends for 49 years consecutively.
Some US stocks with the highest dividend yield may not be part of the Dividend Aristocrats because they may not have been around for long enough. A few of them are listed below:
Verizon, focused on its core business, is likely to benefit immensely from the transition to 5G mobile technology. They have less debt than others in the industry which makes them appealing to investors.
Microsoft is a brand known and trusted worldwide. They are one of the largest companies in the world and have steadily increased their sales. The company has a low payout ratio which leaves a lot of scope for dividend growth.
Apple is a tech giant that has paid dividends only for a few years. They may not be one of the top 10 US dividend stocks, but their loyal customer base and a sound tech ecosystem keep their revenues strong.
Welltower is a real estate investment trust focused on healthcare properties. Welltower is likely to profit from a demographic trend that is long-tailed as the proportion of older age groups in the American population grows gradually.
US stocks dividends can help you augment your income. Investing in good US dividend stocks can help you in diversifying your portfolio too. If you want to invest in US stocks, then INDmoney offers you a zero-cost structure for investing in tech stocks, pharma stocks, or US ETFs of your choice.
All stock investments come with inherent risk. You should research well before investing and should invest only as per your risk appetite.