In this article, we will analyze the list of extreme dividend stocks with upside potential.
Investors often prefer high-yielding stocks for immediate returns. However, dividend growth stocks offer more substantial long-term advantages, such as increasing income, capital appreciation, and reduced volatility. While many investors are drawn to the instant rewards of high-yield stocks, it’s important to be cautious with excessively high yields, as they can indicate underlying financial difficulties. Analysts recommend careful consideration when dealing with very high yields. That said, the stock market is a bit of a wild card—past performance isn’t a reliable predictor of future outcomes. While dividend growth equities have provided strong returns in the past, high dividend yield stocks have also performed well, showing robust returns. This is due to the stock market’s inherent volatility—what works at one time may not be as effective later, and the timing of successes is often uncertain.
Also Read: 10 Best Dividend Stocks with Over 9% Yield According to Analysts
Yin Chen and Roni Israelov, in their study Income Illusions: Challenging the High Yield Stock Narrative, published in the March 2024 Journal of Asset Management, divided stocks into high-dividend and low-dividend categories based on their median dividend yield from the previous year. They examined how dividends affected investment returns under different scenarios. Their research spanned from January 1964 to December 2021 and included the top 1,500 U.S. stocks. The high-dividend portfolio outperformed in both returns and risk, achieving an average annual return of 13.8% with 15.6% volatility. In contrast, the low-dividend portfolio delivered lower returns of 11.8% but with significantly higher volatility at 21.9%. This led to a 3.6% difference in the compound annual growth rate. In addition, the high-dividend portfolio experienced smaller drawdowns during market corrections. Despite the high-dividend stocks’ overall superior performance throughout the entire sample period, investing in a long-short portfolio yielded nearly a 1% annual loss from 2003 to 2021, with the best returns occurring between 1983 and 2002.
Studies like these can confuse investors who often believe that high-yield dividend stocks are inherently risky. However, that’s not always the case. When investing in high-yield stocks, it’s important to evaluate several key metrics, such as payout ratios and debt levels. High-yield stocks usually pay out a significant portion of their free cash flow as dividends, resulting in a high payout ratio. They may also use debt to fund these dividends, leading to higher leverage and increased risk. These factors can make high-yield stocks more vulnerable to dividend cuts during tough times, which can reduce income and potentially lead to significant declines in stock prices.
If payout ratios, debt levels, and fundamental metrics align well, investing in high-dividend stocks might not be a poor choice. Analysts have supported these equities, though it depends on specific market conditions. Brian Belski, BMO’s Chief Investment Strategist, has noted that the “indiscriminate selling” of high dividend payers presents a potential opportunity for investors. He pointed out that, over the past thirty years, high dividend-yielding stocks have only underperformed the broader market during two periods: the tech bubble and the pandemic. Belski suggested that such abnormal underperformance often signals a turning point, with these stocks typically experiencing a strong recovery afterward. Historically, they have outperformed the broader market by over 20% on an annualized basis from trough to peak in relative year-over-year returns for nearly a year, and continue to show above-average performance for nearly two years following the peak.
If this situation holds true and the fundamentals continue to be solid, we would be interested in including these equities in our portfolios as well. With that, let’s look at some of the best dividend stocks with upside potential.
Stocks
Our Methodology:
For this list, we screened for dividend stocks with yields higher than 7% as of August 14. Then, we narrowed down the choices by finding stocks with the highest upside potential according to analysts. Among those stocks, we chose companies that have relatively stable dividend histories, however, a lot of the companies on the list don’t have a consistent record of paying dividends due to their exceptionally high yields. Many of the companies listed below are part of the REIT and energy sectors, as these industries are generally known for their high yields. The stocks are ranked in ascending order of their upside potential, as of August 14.
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10. The Western Union Company (NYSE:WU)
Upside Potential as of August 14: 11.8%
Dividend Yield as of August 14: 8.04%
The Western Union Company (NYSE:WU) is an American multinational financial services company that offers online payment services in over 200 countries and territories. The company was once a standout in its field until PayPal and other similar companies entered the industry. This shift introduced competition from fintech firms that provide quicker, more affordable, and more convenient digital payment options. In addition, the emergence of blockchain and cryptocurrency-based transfer services represents a significant challenge to traditional money transfer businesses. That said, the company remains a leader among similar firms due to its consistent dividend payments.
The Western Union Company (NYSE:WU), one of the best dividend stocks, has been making regular dividend payments to shareholders since 2006. On July 24, the company declared a quarterly dividend of $0.235 per share, which fell in line with its previous dividend. As of August 14, the stock has a dividend yield of 8.04%. The company’s future dividend payments are secure due to its stable payout ratio of 55%. Street analysts maintained a consensus $13.07 price target on WU, which reflects a nearly 12% upside potential.
In addition to a strong dividend policy, The Western Union Company (NYSE:WU) appears well-positioned for growth with rising immigration rates and ongoing globalization. In the second quarter of 2024, the company reported a 4% YoY growth in Consumer Money Transfer transactions. Its Consumer Services Revenue also grew significantly by 21% on a year-over-year basis.
9. Global Medical REIT Inc. (NYSE:GMRE)
Upside Potential as of August 14: 12.3%
Dividend Yield as of August 14: 9.26%
Global Medical REIT Inc. (NYSE:GMRE) is a net-lease real estate investment trust that purchases healthcare facilities and leases them to physician groups as well as regional and national healthcare systems. The company’s portfolio currently consists of 184 buildings, with an average rent escalation of 2.2%. It continues to benefit from acquisitions. In the second quarter of 2024, it maintained strong performance due to the high quality of its portfolio and the reliability of its tenants. During this period, the company announced a purchase agreement for a 15-property portfolio of outpatient medical real estate, totaling $80.3 million. In July, it completed the acquisition of the first five properties for $30.8 million. The acquisition of the remaining 10 properties is expected to be finalized in the fourth quarter of 2024. In addition, the company remains active in monitoring the transaction market and is disciplined in its acquisition strategy. With substantial liquidity, it is well-positioned to continue pursuing acquisitions that meet its quality and return criteria.
In the second quarter of 2024, Global Medical REIT Inc. (NYSE:GMRE) reported an FFO of $13.9 million, or $0.20 per share and unit, compared to $14.7 million, or $0.21 per share and unit, for the same period in the previous year. The company also had stable cash on its balance sheet. At the end of June, it had nearly $5 million available in cash and cash equivalents, up from $1.2 million at the end of December 2023.
Though Global Medical REIT Inc. (NYSE:GMRE) does not hold any dividend growth streak, the company has been paying uninterrupted dividends to shareholders since 2014. Currently, it pays a quarterly dividend of $0.21 per share and has a dividend yield of 9.26%, as of August 14. With an upside potential of 12.3%, GMRE is one of the best dividend stocks according to analysts.
8. Saratoga Investment Corp. (NYSE:SAR)
Upside Potential as of August 14: 12.83%
Dividend Yield as of August 14: 13.33%
An American capital market company, Saratoga Investment Corp. (NYSE:SAR) ranks eighth on our list of the best dividend stocks with upside potential. The company provides debt financing and equity capital to middle-market companies. The stock has dropped nearly 17% over the past year, lagging behind its peer, Capital Southwest Corporation, which saw an increase of more than 7.5% during the same period. However, analysts believe that the company is well-positioned to perform well this year because of its strong operating performance. The company’s performance is supported by the high quality, resilience, and balance of its $1.096 billion portfolio, even amidst current challenges. Despite facing significant issues with two portfolio companies, Pepper Palace and Zollege, the company has taken decisive steps. In fiscal Q1 2025, it further reduced the value of both investments by $1.2 million, bringing their total remaining fair value to $4.4 million. The company has assumed full control of these investments through agreed-upon restructurings with previous sponsors. The restructuring of Zollege was completed in the first quarter, and the restructuring of Pepper Palace is approaching. The company is making management changes, improving capital structures, and adjusting business plans, which could enhance future recovery value.
In addition to its operating performance, Saratoga Investment Corp. (NYSE:SAR) is benefitting from stable interest rates as market forecasts suggest little change for the rest of the year. This stability has resulted in increased recurring net interest margins for the company’s portfolio in the most recent quarter, compared to the previous year. The company’s strong reputation and distinctive market position, combined with the ongoing development of sponsor relationships, are creating appealing investment opportunities for high-quality sponsors. Moreover, there are early indications of a potential uptick in mergers and acquisitions (M&A) within the lower middle market, as seen by several recent repayments. The company reported investment income of $38.7 million for fiscal Q1 2025, marking an 11.7% increase from the same period last year.
Saratoga Investment Corp. (NYSE:SAR) is one of the best dividend stocks on our list as the company has been growing its dividends consistently for the past seventeen quarters. It currently offers a quarterly dividend of $0.74 per share and has a dividend yield of 13.33%, as recorded on August 14. Street analysts maintained a consensus Strong Buy rating on SAR with a $25.06 price target, showing an upside potential of 12.83%.
