Best Dividend Stocks: Background on Dividend Stocks and AI Algorithm’s Top Dividend Choice

This article was written by David Shabotinsky, a Financial Analyst at I Know First, and enrolled at the undergraduate Finance program at the Interdisciplinary Center, Herzliya.

Best Dividend Stocks


  • Background of what dividend stocks are and how dividends are implemented from a financial perspective
  • Different interested in investing in dividend paying stocks
  • I Know First’s self-learning algorithm’s top dividend stock choice

“Compound interest is the eighth wonder of the world. He who understands it earns it … he who doesn’t … pays it.”Albert Einstein

What Are Dividends?

Dividends, essentially are a payout to the shareholders from a firm’s profits. A company has two intrinsic choices to decide what to do with its earnings: pay a dividend or retain that money and use it for further business development and possibly greater future earnings (Retained Earnings on a balance sheet). In the past decade, with major market crashes, dividend stocks have become more attractive to investors looking to maximize their returns on equity investments.

Best Dividend Stocks


There are essentially two types of investors interested in ‘dividend stocks’. The first type are more risk tolerant investors, i.e. those in their twenties, seeking opportunities for a higher compound growth on their investments. These investors are able to reinvest their dividends in the form of mores shares that will hopefully continue to appreciate in value due to the believed intrinsic value of the firm’s stock price. The second type, are those around the retirement age who are more risk averse, because they need to be able have a higher range of liquidity of their assets. The second group of individuals can use the dividend payments as a way to slowly receive cash from the stock, today. Many investors often incorrectly believe that since dividend stocks offer a payout to shareholders, they are either risk-free or a ‘safe’ equity investment. The fallacy in this logic though is that all equity investments are a riskier asset class than other underlying assets such as bond or CDs.

Benefits and Drawbacks of Dividend Stocks

A huge benefit is that you are sharing in the company’s profits by receiving payments from the firm’s balance sheet. Additionally, you are able to earn a greater compound interest on your equity investment. The reason is because you can use that dividend to purchase further shares in the firm, and earn a greater upside on the investment in the stock itself (without including the dividend). The more often you receive that dividend and reinvest it, the greater your rate of return will be. Therefore, if one invests in a firm that is known to pay a steady dividend, eventually the investor will be earning a greater dividend due to one’s position in the company increasing, by the logic of compounding using the reinvested capital.

“Risk comes from not knowing what you’re doing.”- Warren Buffett.

Though dividend stocks have outperformed the S&P 500 Index in 2016, investment opportunity sets that offer relatively high returns often imply a greater risk. The reason is because investors are risk averse, by offering higher risks, they will need to be compensated with a higher return and vice versa. The risks with dividend paying stocks lie mainly in the dividend payout offered. Since dividend payouts are not an obligation, like bond coupons are, if a firm cuts its dividend payout it can adversely affect the share price of a firm. Similar to how high amounts of debt can show financial distress when a firm cuts its dividend pay it can represent that it is in dire financial distress and under poor economic conditions. Furthermore, by offering high dividend payout a firm is essentially choosing not to put that cash into retained earnings and reinvest it into the company for further development. Therefore, it can show that a firm has limited new growth opportunities to boost the share price more ‘organically’.

Furthermore, investors who are not interested in reinvesting the dividends that they receive fall victim to double taxation on those dividend distributions. The reason is because the investor must report those dividend gains as income on their tax reports. In addition, before the firm can pay out those dividends, they must first pay taxes on the earnings themselves.

Dividend Stock Recommendation by Self-Learning Algorithm

A great opportunity in this context, identified by I Know First’s algorithm, is MGA. Magna International Inc. (MGA), is an automotive supplier that has the capabilities to build a fully functioning car with technologically advanced systems, that as well pays a dividend yield of 2.19%. It offers a range of competitive advantages, such as being able to manufacture and build cars, unlike many of its competitors which can only build parts. Additionally, it from a resource based view, it maintains a healthy financial state with a high free cash flow and a ROE of 21.8% compared to the auto parts industry average of 9.9%. MGA’s P/E ratio is 8.9, compared to the industry average of 28, and its debt to equity ratio is as well below the industry level of 0.7 at 0.3. MGA has over $1 billion in cash on its balance sheets which demonstrate a strong financial health which allows it to provide a steady dividend with less concern from investors about reinvesting into RE or R&D. Additionally, strengths come from its wide range of capabilities to be a one stop shop for car manufacturers or suppliers. As a result, sales, for example, has increased for Q3 2016 by 16% from Q3 2015 to $8,849 million. Their sales in the Asian market segment (an area of high focus) had increased by a lofty 58%.

MGA’s strong financial health and extensive capabilities demonstrate an undervaluation in the firm, and its ability to continue to be financially secure. It has as well recovered well from the financial crisis and is now partnering with car companies like BMW, and tech giants such as Apple Inc. The reason is to be able to design and build autonomous cars. This new market represents a huge opportunity for MGA since with its large scope of capabilities it can capitalize on this market opportunity. I Know First rates MGA as one of its top long-term investments, through its self-learning algorithm.

If a company is financially stable, dividend stocks offer investors a great risk reward opportunity. Prominent investment gurus such as Warren Buffett explain that dividend paying stocks offer investors the chance to truly capture the compounding interest effect. Furthermore, a large amount of dividend stocks are healthy companies, with large competitive advantages, or “moats” as buffett explains; and therefore, are expected to steadily grow.


Investors seeking dividend stocks should understand the risk reward payoff from the dividend payments. Though they may seem attractive, double taxation and the non-reinvestment into a firm’s operations, are huge risks associated with them. Compound interest and the time value of money received from these dividend payments, are the main benefits form the dividend payments.

To learn which dividend stocks are I Know’s AI-based algorithm’s top choices click here.