In this article, we will discuss some of the best debt free stocks that pay dividends.
Debt financing is not inherently negative; its impact largely depends on how effectively it is utilized. When managed properly, it can drive substantial cash flow and enhance returns for shareholders. However, poor management of debt can weaken a company’s financial stability. In the second quarter, corporate debt levels decreased despite benchmark interest rates remaining unchanged between April and June. Total debt for both investment-grade and non-investment-grade companies fell to $8.432 trillion, down from $8.517 trillion in the previous quarter. Investment-grade companies reduced their debt by approximately 0.9% to $6.610 trillion, while those rated below BBB- by S&P Global Ratings lowered their debt by about 1.2% to $1.822 trillion, based on data from S&P Global Market Intelligence.
Also read: 10 Dividend Knights that Beat The Market Last 3 Years
The S&P Global report also highlighted that while total debt among U.S. investment-grade companies declined overall, seven out of 10 nonfinancial sectors experienced debt growth in the second quarter. The energy sector recorded the largest increase, with total debt rising by 4.1% to $502.03 billion. However, this increase was largely offset by a significant 12.7% drop, equivalent to $98.87 billion, in debt within the information technology sector. For non-investment-grade companies, debt decreased across eight of the 10 sectors, with consumer staples experiencing the steepest decline at 7.7%. Conversely, total debt rose only in the healthcare and energy sectors within this category.
While many US companies maintain strong balance sheets, a significant share of defaults has come from low-rated firms with negative cash flow, high debt levels, and limited liquidity. These heavily indebted businesses, often referred to as “zombies,” struggle to stay afloat, barely covering their loan interest payments, and are vulnerable to even minor setbacks. An analysis by the Associated Press found that nearly 7,000 publicly traded companies globally, including 2,000 in the U.S., fall into this category. These firms were impacted by years of accumulating inexpensive debt, followed by persistent inflation that pushed borrowing costs to their highest levels in a decade. Additionally, much of the borrowed funds were not directed toward growth initiatives like expansion, hiring, or technological investment but were instead used for stock buybacks.
Financial analysts have pointed out that U.S. companies have not taken sufficient steps to reduce their long-term debt, leading to a worsening situation. For the first time, annual interest expenses have exceeded $1 trillion, reaching $1.16 trillion in 2024. According to a Treasury official, the average interest rate on government debt increased to 3.32% in 2024, compared to 2.97% the previous year. The Congressional Budget Office projects that the national debt, currently near 100% of GDP, will climb to 122% by 2034.
Using debt to support dividends is typically viewed unfavorably, especially in light of practices observed during the 2020 pandemic. At that time, many private companies turned to dividend recapitalization, borrowing funds to maintain dividend payouts. The trend persisted in 2024 as well. As of September 30, 2024, US companies, including those not supported by private equity, have secured a record $70.2 billion in leveraged loans for dividend recapitalizations, based on data from PitchBook. This amount surpasses the $67.2 billion recorded in 2021, the previous high point for such activity.
That said, many companies have maintained stable balance sheets, with US firms consistently setting new records for dividend payments year after year. In view of this, we will discuss some of the best debt free stocks that pay dividends.
Photo by Sharon McCutcheon on Unsplash
Our Methodology:
To create this list, we first used a screener and 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. From that list, we picked 8 companies with the highest number of hedge funds having stakes in them, as per Insider Monkey’s database of Q3 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).
8. Epsilon Energy Ltd. (NASDAQ:EPSN)
Number of Hedge Fund Holders: 7
Market Cap as of December 7: $127.43 million
Enterprise Value as of December 7: $119.6 million
Epsilon Energy Ltd. (NASDAQ:EPSN) is an American independent oil and natural gas company that specializes in the acquisition, development, gathering, and production of natural gas and oil reserves. In its recent earnings call, the company reported its fourth consecutive quarter of growth in liquids volume, revenue, and cash flow from its Permian assets, helping to offset the impact of the current natural gas pricing environment. In Pennsylvania, production and cash flow are expected to increase in the fourth quarter and into next year, supported by improving natural gas market conditions. With a diversified and expanding asset portfolio, the company is well-positioned for volume and cash flow growth in 2025.
Epsilon Energy Ltd. (NASDAQ:EPSN) reported revenue of $7.29 million in the third quarter of 2024, up from $6.31 million in the same period last year. The revenue also beat analysts’ estimates by nearly $403,000. It reported capital expenditures of $3.9 million for the quarter ending September 30, 2024. These expenses were mainly attributed to completing one gross (0.25 net) well in Ector County, Texas, and drilling two gross (1 net) wells in Alberta, Canada.
In addition to this, Epsilon Energy Ltd. (NASDAQ:EPSN) demonstrated strong cash generation. In the first nine months of the year, the company generated over $11.8 million in operating cash flow. At the end of the quarter, it had over $8.3 million available in cash and cash equivalents. Moreover, the company returned $2 million to shareholders through dividends and share repurchases. Currently, it offers a quarterly dividend of $0.0625 per share and has a dividend yield of 4.29%, as of December 7. EPSN is one of the best debt free stocks that pay dividends.
At the end of Q3 2024, 7 hedge funds tracked by Insider Monkey held stakes in Epsilon Energy Ltd. (NASDAQ:EPSN), the same as in the previous quarter. These stakes have a consolidated value of over $33.4 million. Among these hedge funds, Solas Capital Management was the company’s leading stakeholder in Q3.
7. FinVolution Group (NYSE:FINV)
Number of Hedge Fund Holders: 10
Market Cap as of December 7: $1.82 billion
Enterprise Value as of December 7: $585.2 million
FinVolution Group (NYSE:FINV) is a Chinese fintech platform that offers a wide range of related services, including credit risk assessment, loan transactions, and fraud detection. The stock has surged by over 45% since the start of 2024 and has produced solid earnings so far this year. In the third quarter of 2024, the company’s cumulative registered users totaled 166.8 million, reflecting a 9.3% increase from the same date in 2023. During the same period, the number of cumulative borrowers rose to 26.3 million, marking a 6.0% year-over-year growth.
In addition to this, FinVolution Group (NYSE:FINV)’s international revenues rose to RMB635.5 million, reflecting an 8.7% year-over-year increase and accounting for 19.4% of total net revenues. Meanwhile, international transaction volume grew by 22.7% compared to the previous year, reaching RMB2.7 billion. Moreover, transaction volume totaled RMB49.5 billion, marking a 0.8% increase compared to the same period in 2023.
FinVolution Group (NYSE:FINV) ended the quarter with over $727.4 million available in cash and cash equivalents. It is one of the best debt free dividend stocks as the company has been growing its payouts for four consecutive years. The company currently pays an annual dividend of $0.237 per share and has a dividend yield of 3.39%, as of December 7.
As of the close of Q3 2024, 10 hedge funds tracked by Insider Monkey held stakes in FinVolution Group (NYSE:FINV), up from 8 in the preceding quarter. The consolidated value of these stakes is more than $27.8 million. Among these hedge funds, GLG Partners was the company’s leading stakeholder in Q3.
