Looking to add dividend payers to your portfolio? Here are 4 baskets of stocks

Published Fri, Feb 7 20251:16 PM ESTUpdated Mon, Feb 10 202511:27 AM EST

Here's our Club Mailbag email investingclubmailbag@cnbc.com — so you send your questions directly to Jim Cramer and his team of analysts. We can't offer personal investing advice. We will only consider more general questions about the investment process or stocks in the portfolio or related industries. This week's question: What would be your top 5 picks for dividend stocks? — Pedro from Portugal Before digging in on dividend stocks, which are a great way to get paid for owning shares and to super-charge your returns, we must note we are prohibited from opining on names outside Jim Cramer's Charitable Trust, the portfolio we use for the CNBC Investing Club. This limits the universe of stocks. That said, for those interested in researching dividend stocks beyond those in the portfolio, we offered up some thoughts on how to gauge the safety, the sustainability of a dividend payment. As a quick reminder, we would never chase a high dividend yield. In general, a high yield may look attractive but if a company is using up all its cash flow to fund the payment and can't invest in growth or increase the payout, the high yield may be a warning sign. Companies steadily increasing their dividend payout each year may be a better option. With that in mind, 28 portfolio holdings pay dividends. Here are the names in order of annual dividend yield, highest to lowest, as of Feb. 5. Remember, a dividend yield acts kind of like a bond in that it's related to stock price moves. Best Buy (BBY): 4.39% Bristol Myers Squibb (BMY): 4.13% Coterra Energy (CTRA): 2.98% Constellation Brands (STZ): 2.34% Starbucks (SBUX): 2.18% BlackRock (BLK): 2.05% Honeywell (HON): 2.04% Wells Fargo (WFC): 1.99% DuPont (DD): 1.97% Goldman Sachs (GS): 1.87% Abbott Laboratories (ABT): 1.79% Texas Roadhouse (TXRH): 1.35% Linde (LIN): 1.23% TJX Companies (TJX): 1.2% Eaton (ETN): 1.19% Dover (DOV): 1.01% Broadcom (AVGO): 1% Disney (DIS): 0.89% Microsoft (MSFT): 0.8% Eli Lilly (LLY): 0.72% Danaher (DHR): 0.51% Salesforce (CRM): 0.47% Costco (COST): 0.45% Apple (AAPL): 0.43% Alphabet (GOOGL): 0.42% Meta Platforms (META)0.28% GE Healthcare (GEHC): 0.16% Nvidia (NVDA) 0.03% Now, if your primary focus is on income, you are obviously going to be looking toward the top end of this list. However, the dividend yield alone should not be the real focus for any investor concerned with maximizing upside over the long term. Rather, it is total return, the combination of the stock price gain or loss plus dividends that ultimately determines how much money an investor will have at the end of the day. We cannot reinvest dividends for the Trust, but we recommend that investors reinvest. During the past 12 months, the S & P 500 gained 22.8%. On a total return basis, including dividends reinvested, the index returned 24.5% over the same stretch. Over time, that differential can really add up. Another component that somewhat indirectly feeds into the price action over time is share repurchases. Club name Apple , for example, buying back $100 billion worth of shares amounts to a return to shareholders of 2.86% given the company's roughly $3.5 trillion stock market value. You don't get that in cash, but it does increase the earnings per share (EPS) on which a stock is valued. That may matter a bit less if you need annual income to live on — but for longer-term investors who don't need a consistent stream of income from their stock portfolio, it would be a huge mistake not to be mindful of this dynamic. Apple pays a dividend but not much. It's near the bottom our list. Adding the share repurchase return to the dividend amounts to a shareholder return of nearly 3.3% at current levels. Though only a fraction of that is made as a cash payment directly to the shareholder, it all works into the total return In fact, assuming Apple did not buy back any shares between 2015 and the end of 2024, there would be about 23.17 billion shares outstanding right now and EPS in 2024, net income divided by shares outstanding, would have amounted to about $4.05. However, thanks to large, consistent buybacks, there were only about 15.41 billion shares outstanding at the end of 2024 and earnings amounted to $6.08 per share, a 50% increase in the key metric on which the stock is valued. So, you can't only focus on the dividend yield. After all, if you take in 5% worth of dividends but lose 10% on the stock, you're worse off at the end of the day, having lost about 5% overall. You would instead be better off buying a stock that pays no dividend and appreciates a few percentage points, as you can then simply trim the position to raise the desired level of cash. That leads us to craft some baskets of stocks in the portfolio to give members a starting point for deciding on dividend picks. This first one is based on throwing off maximum income. Best Buy (BBY): 4.39% Bristol Myers Squibb (BMY): 4.13% Coterra Energy (CTRA): 2.98% Constellation Brands (STZ): 2.34% Starbucks (SBUX): 2.18% Keeping total return in mind, we do need to consider that the Club currently has a 3 rating on Constellation Brands because we're concerned about the stock's ability to appreciate in the current environment. So, if we swap out Constellation for the sixth-highest dividend-yielding stock, BlackRock would join the list. Best Buy (BBY): 4.39% Bristol Myers Squibb (BMY): 4.13% Coterra Energy (CTRA): 2.98% Starbucks (SBUX): 2.18% BlackRock (BLK): 2.05% This looks like a solid, well-diversified portfolio, though if there were anything others to be changed out, it might be Starbucks or Best Buy being they're both consumer-facing. An alternative might be to bring in Honeywell , the next highest yielder on the list. The result is a list that consists of a consumer stock (SBUX or BBY), a health-care name (BMY), an energy stock (CTRA), a financial (BLK), and an industrial (HON). Best Buy (BBY): 4.39% or Starbucks (SBUX): 2.18% Bristol Myers Squibb (BMY): 4.13% Coterra Energy (CTRA): 2.98% BlackRock (BLK): 2.05% Honeywell (HON): 2.04% One final alternative would be to focus on the top-yielding, 1-rated names in the portfolio. Bristol-Myers Squibb (BMY): 4.13% BlackRock (BLK): 2.05% Honeywell (HON): 2.04% DuPont (DD): 1.97% Goldman Sachs (GS): 1.87% Bottom line There are many things to think about when looking for income-oriented, dividend stocks. Key among them is the total return potential of the holdings and the safety and sustainability of their dividend payments. While we crafted a few examples using the stocks currently owned in the portfolio, you should now have the tools needed to expand the universe of potential inclusions to create the best possible combination for you. As you do think about that expanded universe, be sure to take a look at the Dividend Aristocrats, those names that have consistently paid out a dividend and increased that payout every year, for 25 years straight. There's an S & P 500 Dividend Aristocrats index that tracks those stocks. There are also the Dividend Kings, which include companies that have done that for 50 straight years. There are all kinds of exchange-traded funds (ETFs) that use various mixes of Aristocrats and Kings. (See here for a full list of the stocks INJim Cramer's Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

This week's question: What would be your top 5 picks for dividend stocks? — Pedro from Portugal