In this article, we will analyze the list of the best debt free dividend stocks.
Debt financing isn’t always a bad thing; its effect depends on how companies use it. When managed well, it can generate significant cash flow and boost shareholder returns. However, if misused, debt can harm a company’s overall financial health. Though investor sentiment this year is being boosted by expected interest rate cuts from the Federal Reserve, which is also contributing to this year’s stock market rally, companies in the US still carry excessively high levels of debt on their balance sheets. According to a report by S&P Global Ratings, corporate debt defaults surged last year and could pose challenges again in 2024 as companies with limited cash struggle with high interest rates. In 2023, 153 companies failed to meet their debt payment obligations, a significant increase from 85 in the previous year, representing an 80% rise. This marked the highest default rate in seven years, excluding the spike related to COVID-19 in 2020.
While many U.S. companies have strong balance sheets, a significant portion of the defaults came from low-rated companies with negative cash flows, heavy debt burdens, and weak liquidity. Analysts refer to these heavily indebted companies as “zombies,” as they struggle to survive, barely managing to pay the interest on their loans, and are often one setback away from failure. An Associated Press analysis revealed that the number of such companies has surged to nearly 7,000 publicly traded firms worldwide, including 2,000 in the United States. These companies have been affected by years of accumulating cheap debt, followed by persistent inflation that has driven borrowing costs to their highest levels in a decade. Moreover, zombie debt was frequently not used for expansion, hiring, or investing in technology, but rather for repurchasing their own stock.
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Financial experts indicate that US companies had an opportunity to reduce their debt obligations following then-President Donald Trump’s 2017 tax overhaul, which lowered corporate tax rates and facilitated the repatriation of overseas profits. However, most of this financial benefit was used for stock buybacks rather than addressing debt. As a result, the situation has deteriorated to the point where the government is projected to spend $870 billion this year just on interest payments on its debt, an increase of one-third from the previous year and more than the defense budget.
Even with the tax overhaul, debt wasn’t going to disappear on its own. According to the Federal Reserve, corporate America held a $13.7 trillion debt load in 2023. Company debt has increased by 18.3% since 2020, as businesses capitalized on the Fed’s interest rate cuts during the early days of the COVID-19 pandemic. Moreover, according to a report by the Wall Street Journal, US companies will need to renegotiate approximately $1.87 trillion in corporate debt over the next few years, facing higher interest rates. This will largely depend on their sales forecasts for the coming months and years, as companies will negotiate to secure the most favorable interest rates possible.
Debt is generally not seen as a favorable option for supporting dividends. This was particularly evident during the 2020 pandemic when many private companies resorted to dividend recapitalization—taking on new debt to fund dividend payments. This practice remains common among private equity-backed firms after the pandemic as well. In the first half of 2024, dividend recapitalizations have surged, with about $30.2 billion in leveraged loans issued to cover these payments, matching the amount seen in 2021, which was the highest in at least a decade, according to PitchBook LCD data.
That said, corporate balance sheets are currently strong, with companies worldwide distributing record dividends to shareholders. In this article, we will discuss some of the best debt free dividend stocks that pay dividends.
Speedcurve Performance Analytics
Our Methodology:
To create this list, we first identified companies with minimal or no debt. From this pool, we selected those that consistently pay dividends to shareholders and compared their enterprise value (EV) to their market capitalization to gauge which ones are debt-free. We then narrowed down the list by including stocks that had sustainable dividend yields. The stocks are ranked in ascending order of their dividend yields, as of August 16.
We also measured hedge fund sentiment around each stock according to Insider Monkey’s database of 912 funds as of Q2 2024. 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).
7. Kulicke and Soffa Industries, Inc. (NASDAQ:KLIC)
Dividend Yield as of August 16: 1.8%
Market Cap as of August 16: $2.37 billion
Enterprise Value as of August 16: $1.81 billion
Kulicke and Soffa Industries, Inc. (NASDAQ:KLIC) is a Singapore-based semiconductor manufacturing company that develops cutting-edge semiconductors and electronics assembly solutions. The company’s expanding array of products and services fosters growth and enables technological advancements across large-scale markets. The stock surged by over 3% on August 7 after announcing encouraging earnings. Although the recovery is gradual, rising utilization rates and ongoing short-term industry growth offered a positive outlook for coordinated expansion in capacity and technology across various end markets. The company is also advancing the adoption of its cutting-edge Fluxless Thermo-Compression (FTC), Vertical-Fan-Out (VFO), and High-Power-Interconnect (HPI) solutions through industry partnerships, customer development initiatives, and recent successes in the market.
In fiscal Q3 2024, Kulicke and Soffa Industries, Inc. (NASDAQ:KLIC) reported revenue of $$181.7 million, which though fell by 5% from the same period last year, showed growth by 5.6% on a QoQ basis. Its net income for the quarter came in at $19.3 million, or $0.35 per fully diluted share. As of the most recent quarter, it has roughly $40 million in total debt. The company is confident in its performance this quarter and has provided optimistic guidance for the next, projecting revenue to reach $180 million for the upcoming quarter.
Kulicke and Soffa Industries, Inc. (NASDAQ:KLIC) is a strong dividend payer because of its solid cash generation. In the second quarter of 2024, the company generated $27 million in operating cash flow and its adjusted free cash flow for the period came in at $24.2 million. It ended the quarter with $367 million available in cash and cash equivalents. The company has been growing its dividends for the past four years and currently pays a quarterly dividend of $0.20 per share. During the most recent quarter, it returned $11 million to shareholders through dividends, which makes KLIC one of the best debt-free dividend stocks on our list. The stock’s dividend yield on August 16 came in at 1.8%.
At the end of Q2 2024, 17 hedge funds tracked by Insider Monkey held stakes in Kulicke and Soffa Industries, Inc. (NASDAQ:KLIC), up from 14 in the previous quarter. These stakes are collectively valued at over $170.4 million. Among these hedge funds, Royce & Associates was the company’s largest stakeholder in Q2.
6. RPC, Inc. (NYSE:RES)
Dividend Yield as of August 16: 2.54%
Market Cap as of August 16: $1.36 billion
Enterprise Value as of August 16: $1.12 billion
RPC, Inc. (NYSE:RES) is an American oil and gas company, headquartered in Georgia. The company mainly provides oilfield services and equipment to related companies and industries. The company’s performance has been mixed, reflecting broader industry dynamics. Revenue from the pressure pumping segment, which is the company’s largest service line, dropped by 17% due to lower asset utilization in a highly competitive market, particularly among spot and semi-dedicated customers. However, revenues from all other service lines combined rose by 8%.
RPC, Inc. (NYSE:RES) is also encouraged by its top and bottom-line performance in several areas of the business. Downhole tools had a strong quarter, and there is optimism that newly launched products will sustain this momentum. Cementing and rental tools experienced modest sequential growth, while coiled tubing saw a double-digit increase. The company is enthusiastic about emerging opportunities in coiled tubing, particularly in specialized work that leverages its existing technologies. At the end of the quarter, the company remained debt-free and in fact, returned $8.6 million to shareholders through dividends, which makes it one of the best debt-free stocks that pay dividends.
RPC, Inc. (NYSE:RES) maintained a solid balance sheet, producing sufficient cash flow to benefit its shareholders. Year-to-date, the company’s operating cash flow was $184.5 million and its free cash flow for the period came in at $56.7 million. The dividends paid during this period amounted to $17.2 million. The company began issuing dividends in 1997 and has consistently paid them ever since, except for a two-year pause between 2019 and 2021. Currently, it pays a quarterly dividend of $0.04 per share and has a dividend yield of 2.54%, as of August 16.
As of the close of Q2 2024, 11 hedge funds tracked by Insider Monkey held stakes in RPC, Inc. (NYSE:RES), down from 13 in the preceding quarter. The consolidated value of these stakes is more than $50.6 million.
