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%.
7. Starwood Property Trust, Inc. (NYSE:STWD)
Upside Potential as of August 14: 13.4%
Dividend Yield as of August 14: 9.83%
Starwood Property Trust, Inc. (NYSE:STWD) is a Connecticut-based real estate investment trust company that invests in commercial mortgage properties. The stock surged by nearly 3% on August 3, when it announced its earnings for the second quarter of 2024. Though the company missed analysts’ estimates on various fronts, it managed to improve its debt-to-equity ratio. The company reported that its adjusted debt-to-equity ratio fell to 2.29x from 2.33x, reaching its lowest level in more than two years. A low debt-to-equity ratio benefits income investors because it means the company can allocate more cash toward shareholder returns.
In the second quarter of 2024, Starwood Property Trust, Inc. (NYSE:STWD) has strategically broadened its investments beyond commercial lending, responding to shifts in risk and reward. Currently, over 40% of the company’s assets are invested outside of commercial lending. This diversification, coupled with low leverage ratios, has enabled the company to perform well despite a challenging real estate correction. The company believes that the worst period for the global property sector is over and that the US and Europe are moving towards a period of easing.
Starwood Property Trust, Inc. (NYSE:STWD) has maintained a steady dividend and achieved an annualized return of over 10% since its establishment 15 years ago. Although some businesses may be experiencing a slowdown, others are gaining momentum. The company has never missed a dividend since 2010 and the per-share payout has grown from $0.32 to $0.48 in all these years. With a dividend yield of 9.83% as of August 14, STWD is one of the best dividend stocks on our list.
6. Dynex Capital, Inc. (NYSE:DX)
Upside Potential as of August 14: 13.6%
Dividend Yield as of August 14: 12.84%
Dynex Capital, Inc. (NYSE:DX) is a real estate investment trust company, based in Virginia, US. The company mainly invests in mortgage-backed securities and other real estate assets. On August 12, the company declared a monthly dividend of $0.13 per share, which was consistent with its previous dividend. It has been paying regular dividends to shareholders since 2008, which places it on our list of the best dividend stocks. The company was able to keep up with its monthly payments consistently thanks to its solid cash reserves. At the end of June, it had over $286 million available in cash and cash equivalents, up from roughly $120 million at the end of December 2023. As of August 14, the stock has a dividend yield of 12.84%.
Dynex Capital, Inc. (NYSE:DX) faced challenges during the 2022-2023 period due to elevated short-term interest rates, which increased its interest expenses and put pressure on the trust’s book value. However, this is about to change as mortgage REITs are likely to become more appealing as passive income options in a lower interest rate environment. The Federal Reserve might soon lower the fed funds rate, with a meeting scheduled for September 17-18, 2024, where they will consider this possibility. Due to this, analysts are presenting a bullish on DX. Wall Street analysts have maintained a consensus Moderate Buy rating on the stock with a $13.80 price target, which represents an upside potential of 13.6%.
In the second quarter of 2024, Dynex Capital, Inc. (NYSE:DX) persisted in executing its strategic plan, focused on delivering consistent dividend income through careful management of its capital. It effectively secured funding at advantageous rates and is set to benefit from the historically wide spreads in the mortgage market. Recognizing the value of human capital, the company made several key decisions to support its future success.
5. Enterprise Products Partners L.P. (NYSE:EPD)
Upside Potential as of August 14: 18.16%
Dividend Yield as of August 14: 7.36%
Enterprise Products Partners L.P. (NYSE:EPD) is a midstream natural gas and crude oil pipeline company that provides related products and petrochemicals. The company benefits a lot from its business model as midstream companies own essential infrastructure like pipelines, storage facilities, and transportation systems. These assets are crucial for linking the upstream sector (drilling) with the downstream sector (refining and chemicals) and for connecting to global markets. These companies typically earn revenue by charging fees for the use of their infrastructure, making them toll-taker businesses. Consequently, their financial performance is more influenced by energy demand than by energy prices. Since energy demand remains strong even when prices are low, this provides stability.
Enterprise Products Partners L.P. (NYSE:EPD) is also a great investment from a dividend point of view. Firstly, it has strong cash generation capabilities. In the second quarter of 2024, the distributable cash flow (DCF) came in at $1.8 billion, up from $1.7 billion in the same period last year. Its operating cash flow also grew to $2.1 billion during the quarter, from $1.9 billion in the prior-year period. For the twelve months ending June 30, 2024, the company’s payout ratio, which includes distributions to common unit-holders and buybacks of partnership common units, was 55 percent of adjusted cash flow from operations.
In addition to this, Enterprise Products Partners L.P. (NYSE:EPD) has raised its dividends for 26 consecutive years. On July 11, the company announced a 1.9% hike in its quarterly dividend to $0.525 per share. In the second quarter of 2024, the company’s DCF covered these dividend payments by 1.6 times, and it retained $661 million in DCF. As of August 14, the stock offers an impressive dividend yield of 7.36%. Analysts hold a consensus Strong Buy rating on EPD with a $33.7 price target, showing an 18% upside potential.
4. Energy Transfer LP (NYSE:ET)
Upside Potential as of August 14: 24.4%
Dividend Yield as of August 14: 8.11%
Energy Transfer LP (NYSE:ET) ranks fourth on our list of the best dividend stocks with upside potential. The Texas-based pipeline transportation company is up by nearly 15% since the start of 2024, mainly because of strong quarterly earnings in the first two quarters of the year. The company experienced robust volume growth in the second quarter of 2024 across its various segments, with crude oil transportation volumes leading the way with a 23% increase. Both crude oil terminal and NGL fractionation volumes grew by 11%, while refined product volumes increased by 9%. The company’s revenue in the quarter came in at $6.17 billion, which showed a 7.47% growth from the same period last year.
New growth projects and acquisitions have played a key role in boosting volumes across Energy Transfer LP (NYSE:ET)’s assets. In July 2024, the company finalized its acquisition of WTG Midstream Holdings LLC, adding around 6,000 miles of gas-gathering pipelines that enhance its network in the Midland Basin. This deal also included eight gas processing plants with a combined capacity of approximately 1.3 Bcf/d, along with two more processing plants under construction. Since the acquisition, one of these 200 MMcf/d plants has already become operational. In addition, Energy Transfer LP (NYSE:ET) and Sunoco LP announced a joint venture, merging their crude oil and produced water gathering assets in the Permian Basin.
Energy Transfer LP (NYSE:ET) also reported a strong cash position, which is good news for income investors. The company’s distributable cash flow (DCF) was $2.04 billion, up from $1.55 billion in the prior-year period. On July 26, the company hiked its quarterly dividend by 0.8% to $0.32 per share. This was the company’s 11th consecutive quarterly dividend increase, which makes ET one of the best dividend stocks on our list. The stock’s dividend yield on August 14 came in at 8.11%.
3. Park Hotels & Resorts Inc. (NYSE:PK)
Upside Potential as of August 14: 37.6%
Dividend Yield as of August 14: 7.19%
Park Hotels & Resorts Inc. (NYSE:PK) is an American real estate investment trust company that mainly invests in hotel properties. The company encountered some difficulties in its business travel segment during the pandemic, but the latest quarterly earnings reveal encouraging results. The company has seen growing demand as business travel picks up and group demand remains strong, particularly at its resort hotels and certain urban locations. In fact, comparable group revenues for the second quarter of 2024 rose by nearly 8% compared to the previous year. The stock delivered a nearly 12% return in the past 12 months.
Seeing strong momentum in its different segments, Park Hotels & Resorts Inc. (NYSE:PK) is also moving forward with capital investments. Looking ahead, the company has outlined its plans for capital investments in 2024, projecting expenditures between $270 million and $290 million. Of this amount, $51 million was allocated during the second quarter of the year. The company is focusing on several key renovation and return-on-investment projects.
Vulcan Value Partners also highlighted the company’s business in its Q4 2023 investor letter. Here is what the firm has to say:
“Park Hotels & Resorts Inc. (NYSE:PK) is a real estate investment trust (REIT) that owns a number of Hilton’s flagship properties including the Hilton Hawaiian Village and the New York Hilton. The company reported a solid quarter. Importantly, the company decided in June to return its two large hotels in San Francisco to the debt holders, and in October, they were placed into court-ordered receivership. The process has now reached a point where the company no longer has any financial obligation to these properties. As a result, the company’s balance sheet has been strengthened. The company also repurchased 3% of shares outstanding and announced its intention to pay a special dividend in the fourth quarter. We are pleased that the market has begun to appreciate the value of Park Hotels, and we think its shares remain discounted.”
Park Hotels & Resorts Inc. (NYSE:PK) has been distributing dividends to shareholders since it spun off from Hilton Worldwide in 2017, although it temporarily halted payments for nearly two years in 2020 due to the pandemic. currently, it offers a quarterly dividend of $0.25 per share, having raised it by 67% in February this year. The company aims for a payout ratio between 65% and 70% of Adjusted FFO per share for the entire year. According to the company’s current guidance, this strategy suggests an additional top-off dividend will be declared in the fourth quarter of 2024. With a dividend yield of 7.2% as of August 14, PK is one of the best dividend stocks on our list.
2. SFL Corporation Ltd. (NYSE:SFL)
Upside Potential as of August 14: 38.9%
Dividend Yield as of August 14: 9.3%
With a projected upside potential of 39%, SFL Corporation Ltd. (NYSE:SFL) ranks second on our list of the best dividend stocks. The Bermuda-based ship-owning and chartering company owns and manages a fleet of 81 vessels, which includes tankers, bulk carriers, container ships, car carriers, and energy assets.
SFL Corporation Ltd. (NYSE:SFL) reported strong business momentum in the second quarter of 2024. It is going ahead with its execution of the growth strategy, having added over $2 billion to its charter backlog this year through a combination of vessel acquisitions and charter extensions on existing vessels. The charter backlog now totals nearly $5 billion. Over the past decade, the company has developed a high-quality operational platform, allowing it to secure repeat transactions with key customers. Simultaneously, it has diversified its asset mix and expanded its customer base. This evolution has refined the business model from solely being a financing provider to facilitating maritime infrastructure for logistics companies.
SFL Corporation Ltd. (NYSE:SFL) is a strong dividend payer with solid cash reserves. At the end of Q2 2024, the company had over $186 million available in cash and cash equivalents. The company has been making regular dividend payments to shareholders for the past 82 consecutive quarters. Since the inception of its dividend policy in 2004, the accumulated dividends have grown from $0.6 billion to $2.6 billion at the end of 2023. It currently pays a quarterly dividend of $0.27 per share for a dividend yield of 9.3%, as of August 14.
1. Vale S.A. (NYSE:VALE)
Upside Potential as of August 14: 51.33%
Dividend Yield as of August 14: 12.10%
A Brazilian multinational mining company, Vale S.A. (NYSE:VALE) tops our list of the best dividend stocks. The company’s performance remained robust in the second quarter of 2024, partly due to changes in its leadership team. Shaun Usmar was appointed as the new CEO to lead the copper and nickel business, bringing with him extensive mining experience and strategic insight.
Vale S.A. (NYSE:VALE)’s operational performance has remained strong each quarter. In its Iron Ore Solutions segment, the company reached record-high production for the second quarter since 2018. As part of its strategic goal to become the preferred supplier for low-carbon steel, the company is making progress on major growth projects like Vargem Grande and Capanema, which are expected to add 30 million tonnes of capacity over the next twelve months. Additionally, the company is pleased to announce a new partnership under its Mega Hubs strategy, which further enhances its position as a competitive supplier of direct reduction products. In the second quarter of 2024, the company generated over $9.9 billion in revenues, showing a 3% growth from the same period last year.
Vale S.A. (NYSE:VALE) has always remained committed to its shareholder obligation. During the quarter, the company allocated $114 million to its fourth buyback program. As of July 26, this buyback program was 22% completed, with 33.1 million shares repurchased. Moreover, $1.6 billion in interest on capital is set to be paid in September 2024, in line with the company’s minimum dividend policy applied to the first half of 2024 results. The stock supports a dividend yield of 12.10%, as of August 14.
While we acknowledge the potential of VALE as an investment, our conviction lies in the belief that some deeply undervalued dividend stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued dividend stock that is more promising than VALE but that trades at less than 7 times its earnings and yields nearly 10%, check out our report about the dirt cheap dividend stock.
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Disclosure: None. This article is originally published at Insider Monkey.
