Written by Nicholas Say. Updated by TraderHQ Staff.
Anyone who wants to create passive income with equities should know how to invest in dividend stocks. Many stocks pay a portion of their profits back to investors with regular payments, called dividends.
The 2026 Dividend Landscape: With the Fed holding rates at 3.50-3.75% (March hold expected) and CAPE near 40 (second-highest in 155 years), dividend investors face real competition from bonds while navigating a market where selectivity is paramount. Market dispersion has surged to 71 points—the year’s highest and EXCEPTIONAL territory where the top 20 stocks average +43.1% YTD and the bottom 20 average -27.8% YTD. The Dow crossed 50,000 for the first time on February 6, yet beneath the milestone, sector divergence is stark: Energy (+19.1%) leads while Tech (-2.0%) lags. Dividend stocks must now justify their risk premium over risk-free alternatives—but dividend growers in sectors like Energy and Materials are proving their worth.
Much in the same way that a bond or bond fund creates passive income, dividend stocks make it simple to buy an asset and create a revenue stream. There are also ETFs that specialize in paying dividends, which are a great way to buy a range of individual stocks at once. However, when bonds yield 4%+, the case for dividend stocks rests on dividend growth potential and capital appreciation—not just current yield.
Like any kind of investment, buying dividend stocks requires some amount of education. There are many kinds of stocks and ETFs that pay dividends, and also some potential risks that need to be understood.
Dividend Paying ETFs
There are a few ways to create a portfolio of dividend-bearing stocks. Probably the easiest is to buy a few ETFs that pay dividends. You can also research individual stocks and create your own basket of dividend-paying companies, which is substantially more work. REITs are a specialized company structure designed to return capital to investors, and they also may be worth a look.
Buying ETFs that pay dividends is just like buying any other kind of ETF, but you will need to look at a few metrics before you make a purchase. One of the biggest advantages to buying dividend-bearing ETFs is that the company managing the ETF does all of the research for you. These ETFs will have built-in diversification, which is another great benefit.
Important Things to Consider When Buying a Dividend ETF
- Expense Ratio: The company that manages the ETF charges for its services. This is called the expense ratio. Clearly, lower is better. If the expense ratio is above 0.50% per year, it would be worth looking for a cheaper alternative.
- Dividend Yield vs. Treasury Benchmark: This is how much the ETF (or a company) will pay as a percentage of its market price. With 10-year Treasuries yielding 4.29%, any dividend ETF yielding less must offer compelling growth potential to justify the equity risk. This rate changes as the component companies adjust their dividends and the price of the ETF’s shares fluctuate.
- Dividend Growth Rate: In a 4%+ yield environment, a static 3% dividend yield loses to Treasuries. Look for ETFs with constituent companies that have historically grown dividends 5-10% annually—this growth compounds over time and eventually surpasses fixed bond income.
- Five Year Returns: The opposite of an expense ratio—higher returns are your goal.
- Market Cap of Component Companies: In general, an ETF will have guidelines about the size of the companies that make up the fund. Large-caps tend to be more liquid and less volatile.
- Quality Metrics: With elevated valuations (CAPE ~40, second-highest in 155 years), prioritize ETFs that screen for balance sheet strength, consistent earnings, and sustainable payout ratios. Quality stocks with economic moats are better positioned to maintain dividends through economic cycles.
Once you figure out which dividend ETFs are the best fit for your needs, you can buy them like any other ETF from your broker. In most cases, the dividends will be paid into your brokerage account directly, and you can either withdraw the payments or reinvest them.
Build Your Own Dividend Stock Portfolio
If you decide to build your own dividend stock portfolio, it will almost certainly be more focused than a dividend stock ETF. There are a few things to consider before you go this route and start sifting through the thousands of stocks in the U.S. markets that pay a dividend.
Why individual selection matters now: With market dispersion at 71 points—the year’s highest—skilled stock selection can significantly outperform broad dividend ETFs. The gap between the top 20 stocks (+43.1% YTD) and bottom 20 (-27.8% YTD) is EXCEPTIONAL. Quality companies with pricing power and sustainable competitive advantages are better positioned in a 2.7% CPI environment where inflation protection matters, and Challenger layoffs at 108,435 in January (highest since 2009) make dividend reliability even more important.
- Risk vs. Outperformance: It is almost always true that when a portfolio has less diversification, it will move more than the overall market in percentage terms (also called “beta”). If you are a skilled stock picker, this could be an advantage, although very few people can beat the markets consistently over time. In high-dispersion markets, concentrated quality positions can meaningfully outperform.
- Time Involved: Don’t underestimate the amount of time it will take to sort through all the stocks that pay a dividend. Creating a dividend stock portfolio requires time not only to build the portfolio but also to keep on top of all the changes companies make.
- Dividends Rise and Fall: In addition to probably having higher beta, a more concentrated dividend stock portfolio will be sensitive to changes in the dividends at the component companies. If one of the companies lowers the payment or cuts the dividend entirely, the impact on your overall portfolio will be much higher than it would be with an ETF.
- Prioritize Dividend Growers: With bonds yielding 4.29%, static high-yield stocks offer little advantage. Focus on companies with 10+ year dividend growth streaks, low payout ratios (under 60%), and strong free cash flow generation. These “dividend growers” offer both current income and the potential to outpace inflation over time.
What About REITs?
A REIT, or Real Estate Investment Trust, is a classification of company that allows investors to buy and sell shares in an entity that owns revenue-producing real estate. These shares are traded on major exchanges and are extremely liquid.
REITs are required by law to distribute at least 90% of their taxable income to shareholders, which often results in attractive dividend yields. However, any real estate investments that rely on tenants paying rent should be evaluated carefully based on current economic conditions.
REITs in a 4.29% Treasury environment: Higher rates create headwinds for REITs due to increased borrowing costs and competition from bonds. Focus on REITs with strong balance sheets, low leverage ratios, and pricing power (such as data centers, cell towers, or industrial properties with embedded rent escalators). Avoid highly leveraged REITs that depend on cheap refinancing.
Keep Your Income Streams Diversified
Dividends aren’t like interest payments from a bond. Companies can and do cut or eliminate dividends, which makes diversification even more important for dividend stock investors.
You should also be cautious of a company paying a very high dividend yield, as this may mean the stock has been sold down and the company will be slashing the dividend in the near future. In today’s market, any yield significantly above the 4.29% Treasury rate deserves extra scrutiny—it may signal elevated risk rather than opportunity.
Build a barbell approach: Consider combining Treasury bonds (for guaranteed 4%+ income) with high-quality dividend growth stocks (for appreciation and inflation protection). This provides stable income while maintaining upside exposure to companies that can compound wealth over time.
The Bottom Line
Dividend stocks are a good way to gain exposure to the capital appreciation that equities offer while also creating income. In a 4.29% Treasury yield environment, the value proposition shifts: dividend stocks must offer either meaningful growth potential or a compelling total return story that bonds cannot match.
Reinvesting your dividends after they are paid can help you boost your income over time through compounding and grow your exposure to a company or fund. Focus on quality companies with economic moats, sustainable payout ratios, and strong dividend growth histories—these are the holdings that will compound wealth regardless of interest rate cycles.
Frequently Asked Questions
What is a good dividend yield to look for?
With 10-year Treasuries yielding 4.29%, the calculus has changed. A dividend yield between 2.5% and 5% is reasonable for growth-oriented dividend stocks, but only if accompanied by a strong dividend growth track record (7%+ annually). Yields above 6% often signal elevated risk—the stock price may have fallen significantly, indicating the dividend could be cut. Focus on companies with sustainable payout ratios (under 60%), consistent earnings growth, and a history of raising dividends for 10+ consecutive years.
How often are dividends paid?
Most U.S. companies pay dividends quarterly, though some pay monthly, semi-annually, or annually. REITs and certain ETFs often pay monthly. You must own the stock before the “ex-dividend date” to receive the upcoming dividend payment. The actual payment typically arrives a few weeks after the ex-dividend date.
Should I reinvest dividends or take the cash?
This depends on your goals. If you’re building wealth for the long term, reinvesting dividends through a DRIP (Dividend Reinvestment Plan) allows you to compound your returns by automatically purchasing more shares. If you need current income or are in retirement, taking dividends as cash makes more sense. Many brokers offer automatic reinvestment at no additional cost.