5 Best Dividend Growth Stocks With High Upside Potential: Part 1

Given that dividends are an investor’s best friend and dividend growth can mean solid returns down the road, we at Insider Monkey have put together a list of the smart money’s favorite dividend growth stocks. Each name on our list has increased its annual payout for at least 25 years and currently yields an annual payout of over 2%.

Because hedge funds generally invest in stocks for their upside rather than for their dividend, each name on our list also has upside potential. So without further elaboration, let’s examine AT&T Inc. (NYSE:T), Altria Group Inc (NYSE:MO), Target Corporation (NYSE:TGT), Nucor Corporation (NYSE:NUE), and Kimberly Clark Corp (NYSE:KMB).

We follow over 700 hedge funds and other institutional investors and by analyzing their quarterly 13F filings, we identify stocks that they are collectively bullish on and develop investment strategies based on this data. One strategy that outperformed the market over the last year involves selecting the 100 best-performing funds and identifying the 30 mid-cap stocks that they are collectively the most bullish on. Over the past year, this strategy generated returns of 18%, topping the 8% gain registered by S&P 500 ETFs.

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#5 Kimberly Clark Corp (NYSE:KMB)

– Number of Hedge Fund Holders (as of September 30): 29
– Total Value of Hedge Fund Holdings (as of September 30): $1.42 billion
– Hedge Fund Holdings as Percent of Float (as of September 30): 2.10%

While the consumer staples sector isn’t sexy, many of the larger companies, with Kimberly Clark Corp (NYSE:KMB) among them, have proven to be very dependable. With multiple well-known brands such as Kleenex, Viva, Neve, and more, Kimberly Clark has both scale and diversity across multiple product categories. Kimberly-Clark also has an enviable dividend history, having raised its payout for 43 consecutive years. Although the stock is down by 7% year-to-date, 29 funds in our system were long Kimberly Clark Corp (NYSE:KMB) at the end of September, up by 7 funds from the previous quarter. The stock also yields over 3.17% at current prices.

#4 Nucor Corporation (NYSE:NUE)

– Number of Hedge Fund Holders (as of September 30): 29
– Total Value of Hedge Fund Holdings (as of September 30): $415.84 million
– Hedge Fund Holdings as Percent of Float (as of September 30): 3.20%

Although the steel sector is very hotly contested, Nucor Corporation (NYSE:NUE) has a large competitive advantage. It is one of the lowest cost-producers in the industry, and its management has traditionally been conservative. Nucor’s low cost and its management style have allowed the company to raise its dividend payout for 42-straight years, giving it a current yield of 2.39%. With President-elect Donald Trump’s potential pro-steel policies, many funds will likely be bullish on the company’s profit prospects down the road. If Nucor’s profits rise, its dividend could continue trending higher.

We’ll check out three more of hedge funds’ favorite dividend growth stock picks on the next page.

#3 Target Corporation (NYSE:TGT)

– Number of Hedge Fund Holders (as of September 30): 30
– Total Value of Hedge Fund Holdings (as of September 30): $702.82 million
– Hedge Fund Holdings as Percent of Float (as of September 30): 1.80%

While it may not be an e-commerce giant with a fast-growing cloud division, Target Corporation (NYSE:TGT) is a dividend aristocrat, having raised its annual payout for 48-straight years. Due to its dividend hikes, Target currently pays an annual dividend of $2.40 per share, good for a 3.05% yield. If Donald Trump follows through with his promise of making the economy stronger and cutting taxes for the middle class, Target could benefit with higher growth and margins. Given management’s history of generously returning capital back to shareholders, Target shareholders could see more buybacks and dividend hikes. John A. Levin‘s Levin Capital Strategies increased its stake in Target by 334% during the third quarter, to slightly over 1.8 million shares at the end of September.

#2 Altria Group Inc (NYSE:MO)

– Number of Hedge Fund Holders (as of September 30): 40
– Total Value of Hedge Fund Holdings (as of September 30): $1.77 billion
– Hedge Fund Holdings as Percent of Float (as of September 30): 1.40%

Cigarettes may be bad for one’s health, but Altria Group Inc (NYSE:MO) has certainty been healthy for many investors’ portfolios. As the parent company of Philip Morris USA and accounting for spin-offs, Altria has raised its payout for 46-consecutive years, giving it a current yield of 3.78%. Although the stock topped in early-July, some traders hope that potential industry consolidation could lead to even better margins for Altria in the quarters to come. 40 funds that we track had a bullish position in Altria Group Inc (NYSE:MO) at the end of the third quarter, down by 6 funds from the end of the previous quarter.

#1 AT&T Inc. (NYSE:T)

– Number of Hedge Fund Holders (as of September 30): 51
– Total Value of Hedge Fund Holdings (as of September 30): $2.55 billion
– Hedge Fund Holdings as Percent of Float (as of September 30): 1.30%

With 51 funds out of the 742 that we follow which filed 13Fs for the September quarter, AT&T Inc. (NYSE:T) is the smart money’s favorite dividend growth stock on our list. Given the telecom’s capital return policies, it’s not hard to see why so many hedge funds like the stock. Not only has AT&T grown its dividend for the past 31 years, but the stock also pays a yield of around 5%. While shares have been under pressure due to debt concerns caused by the tentative Time Warner purchase, many funds evidently think that the deal will either be rejected and the debt concerns will go away, or that the deal will get the green light and management will successfully integrate Time Warner. The bears likely disagree with that sentiment, however.

Disclosure: None