If you’re a dividend investor and like to invest in socially responsible companies, then the  iShares ESG Aware MSCI USA ETF (ESGU) may already be on your radar. It’s one of the largest funds in stocks that meet certain environment, social and governance standards. It pays a modest dividend – but what if you could invest just in the highest-yielding ESG stocks?

Here are the biggest-yielding dividend stocks from one of the largest ESG stock funds.

Highest-dividend ESG stocks

The highest-yielding stocks in the iShares fund may not seem immediately like what you may be thinking of as ESG stocks – some telecom companies, some energy companies and some financial institutions. Here are the top ten biggest payouts from the fund.

Company Yield
AT&T (T) 7.9%
Verizon (VZ) 7.9%
Truist Financial (TFC) 7.2%
Pioneer Natural Resources (PXD) 6.9%
UGI Corporation (UGI) 6.5%
Crown Castle (CCI) 6.0%
3M (MMM) 6.0%
ONEOK (OKE) 5.8%
Huntington Bancshares (HBAN) 5.6%
Prudential Financial (PRU) 5.4%

Source: Yahoo Finance, data as of Aug. 21, 2023

While high yields are tempting, they may not be sustainable, and the high yield may be evidence that investors are expecting the company to cut the dividend in the near term. So some investors avoid the very highest stock yields and instead turn to the next tier down, expecting that these stocks will offer more sustainable yields that could even grow over time.

Stocks with a long-term record of growing their dividend remain a popular option with investors. Not only do they tend to offer a more secure yield, but they’ll grow it over time. The best of the dividend growth stocks are called Dividend Aristocrats, and these stocks have a track record of growing their payouts every year for at least 25 years – making them quite popular!

What you need to know when in investing in dividend stocks

If you’re buying into individual dividend stocks, you’ll need to analyze the company to see whether the dividend is sustainable before you buy the stock. If you want the easy way to buy a portfolio of dividend stocks without a lot of analysis, then look for the best dividend ETFs.

Here are some key things to review when looking at dividend stocks:

  • Current dividend yield: A too-high yield may be a sign that the dividend is in danger of being cut. If the dividend is cut, it usually hurts the stock price. But if you’re buying a low yield, it may not grow fast enough if you need the income. Striking a balance between too high and too low a dividend can help you enjoy a sustainable yield that can grow.
  • Payout ratio: The payout ratio is the company’s dividend divided by its profit. The lower this figure, the more sustainable the dividend and the more the company can grow the payout safely. If the payout ratio regularly surpasses 100 percent or even approaches it, you should expect the dividend to be cut.
  • Business stability: A stable business allows the company to regularly increase its payout and gives it the ability to run a higher payout ratio, all else equal. For example, telecom companies tend to be stable businesses, while energy companies are often beset by boom-and-bust cycles that hurt their profitability.
  • Dividend growth rate: The stock’s historical dividend growth rate can give you a sense for whether the dividend will grow in the future. A fast-growing dividend can quickly make up for a dividend that’s a bit lower today, especially if that dividend is more sustainable.

Companies with a long-term record of paying a growing stream of dividends are some of the best bets for dividend investors. The list of Dividend Aristocrats is a great place to start researching dividend stocks, and then you can cross-reference them to see if they appear on ESG lists, too. So you can meet your dividend and ESG criteria that way.

Finally, if you really want to build a dividend dynamo, then reinvest your dividends into more shares of dividend-paying stocks. You can set up your brokerage account to invest your dividends into more shares and compound your payouts over time. The best brokers for reinvested dividends let you buy fractional shares, putting your whole dividend to work.

Bottom line

If you’re investing in dividend-paying ESG stocks, you’ll need to look carefully at the company’s financials and competitive position. It’s far easier to invest in a dividend ETF or even a dividend-paying mutual fund, and you’ll enjoy the safety of a diversified portfolio. And of course, if you want a dividend-paying ESG fund, you’ll need to look specifically for that type of fund.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.