In this article, we will take a look at some of the best GARP stocks that pay dividends.
Over the past year, the market has highlighted the importance of diversifying portfolios to manage risk. Selecting stocks that perform well under various economic conditions has consistently been a challenge for investors, as strategies that work in one market may not work in another. For instance, growth and value stocks have shown different performance trends in various market conditions, making both approaches appealing to investors. Combining elements of both strategies can provide a refreshing alternative to traditional investment plans. This is where the GARP strategy comes into play. Growth at a Reasonable Price (GARP) is an investment strategy that focuses on finding companies with strong, sustainable earnings growth and appealing valuations in relation to their growth potential. These companies are often in sectors with positive growth trends or have competitive advantages that position them for future success.
The GARP strategy, popularized by Peter Lynch, aims to strike a balance between growth and value investing by avoiding the extremes of either approach. It focuses on finding growth stocks that have relatively low price-to-earnings ratios under typical market conditions. When these stocks are identified successfully, they can offer strong returns for investors. Historically, the GARP Index has outperformed its benchmark by tracking companies that demonstrate consistent fundamental growth, reasonable valuations, and strong earnings potential.
Also read: 10 Cheapest Dividend Aristocrats to Buy Now
The strategy has gained popularity not just in the US, but also globally. After Global X launched the first global broad-based index exchange-traded fund (ETF) in Australia using the GARP framework in September 2024, the strategy delivered strong early-stage performance. According to a Global X report, while global equity markets experienced a rally towards the end of 2024, the GARP stocks outperformed the broader market and other factors like quality, rising approximately 20% since the ETF’s launch. The report also noted that GARP’s success wasn’t driven by technology, but rather by broader sectors such as consumer goods, financials, and communication.
Analysts globally are also advocating for the GARP strategy. For instance, Brian Belski, chief strategist at BMO Capital, recommended that Canadian investors adopt the GARP approach this year. Here are some comments from the analyst:
“Growth at a Reasonable Price (GARP) remains one of our key style preferences for Canadian equities. Furthermore, earnings growth and revision trends are broadly consistent with the market, suggesting there are likely many opportunities developing in Canada to implement a growth at a reasonable price strategy.”
In the US, a report from S&P Dow Jones Indices revealed that the GARP Index delivered an average annual return of 13.2% from June 1995 to June 2019, outperforming the broader market’s 9.81% growth. Over the same period, the market’s Growth Index and the Enhanced Value Index returned 10.41% and 11.83%, respectively. The report also highlighted that the GARP Index achieved better risk-adjusted returns compared to both the growth and value indices during this time frame.
A CNBC report also highlighted insights from BMO’s analysts regarding investment strategies to navigate market uncertainties in the U.S. According to the report, investors should consider the GARP approach alongside dividend growth strategies in the current financial landscape. Dividend stocks have historically performed well during inflationary periods, making them a favored choice among investors. Given this, we will take a look at some of the best GARP stocks that pay dividends.
Photo by Karolina Grabowska: https://www.pexels.com/photo/hands-holding-us-dollar-bills-4968630/
Our Methodology:
GARP stocks have reasonable valuations and strong growth potential, which means that their P/E ratios are not necessarily as low as value stocks. For this article, we used the GARP Index (SPXGARPP) and identified dividend stocks from the list. From that group, we picked 10 dividend companies with the highest number of hedge fund investors, according to Insider Monkey’s database of Q3 2024. These stocks were ranked based on the number of hedge funds having stakes in them.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
10. Archer-Daniels-Midland Company (NYSE:ADM)
Number of Hedge Fund Holders: 34
Archer-Daniels-Midland Company (NYSE:ADM) is an American multinational food processing and commodities trading company, based in Illinois. The company cultivates a diverse range of crops, such as soybeans, corn, and wheat. It is also actively involved in innovation, having played a role in the creation or advancement of products like textured vegetable protein, high-fructose corn syrup, ethanol, and Omega-3 fatty acids.
Archer-Daniels-Midland Company (NYSE:ADM) fell short of investor expectations in the fourth quarter of 2024. As a commodity-driven business, ADM’s performance is heavily influenced by market prices, leading to fluctuations beyond its control. Due to the nature of its operations, the company operates with thin gross margins, which resulted in a 22% decline in gross profit to $1.36 billion. In addition, its gross margin dropped from 7.6% to 6.3%. However, revenue reached $21.5 billion, reflecting a 6.4% increase from the same quarter last year. GAAP earnings per share came in at $1.17, marking a 10% rise year over year.
In addition, Archer-Daniels-Midland Company (NYSE:ADM)’s cash position provided some reassurance to concerned investors. By the end of 2024, the company had $611 million in cash and cash equivalents. Over the year, it generated $2.8 billion in cash flows from operating activities, with operating cash flow before working capital adjustments totaling $3.3 billion. On February 4, the company announced a 2% increase in its quarterly dividend to $0.51 per share, marking its 52nd consecutive year of dividend growth. Moreover, it has maintained an uninterrupted dividend payout for 93 years, which makes ADM one of the best GARP stocks on our list. The stock has a dividend yield of 4.44%, as of February 14.
9. Diamondback Energy, Inc. (NASDAQ:FANG)
Number of Hedge Fund Holders: 49
Diamondback Energy, Inc. (NASDAQ:FANG) is a Texas-based independent energy company that is engaged in the exploration of hydrocarbons. The company finalized its merger with Endeavor Energy Resources last year, establishing itself as a key operator in the Permian Basin, a region responsible for nearly 40% of US oil production and 15% of the country’s natural gas output.
Following its $26 billion acquisition of Endeavor Energy Resources, the company has taken steps to improve its balance sheet and lower debt. It recently disclosed that it has finalized an agreement to sell specific mineral and royalty interests to its subsidiary, Viper Energy, in a deal valued at $4.45 billion.
Diamondback Energy, Inc. (NASDAQ:FANG) maintains a solid cash position. In the most recent quarter, the company generated $1.2 billion in operating cash flow and reported a free cash flow of $780 million. During this period, it returned $708 million to shareholders through dividends, accounting for roughly 78% of its Adjusted Free Cash Flow. The company follows a strategy of returning at least half of its free cash flow to investors. It remains committed to steadily increasing its dividend, which has grown at an average quarterly rate of 8% since its launch in 2018, outpacing industry peers. In addition, the company plans to repurchase shares and, if surplus cash is available, distribute a variable dividend to shareholders.
Diamondback Energy, Inc. (NASDAQ:FANG), one of the best GARP stocks, currently offers a quarterly dividend of $0.90 per share for a dividend yield of 5.28%, as of February 14. The company initiated its dividend policy in 2018 and has paid regular dividends to shareholders since then.
