In this article, we will take a look at some of the best dividend stocks with over 7% yield according to hedge funds. Altria Group, Inc. (NYSE:MO) topped our list of the 10 Best Dividend Stocks with 7+% Yield and we have analyzed the stock in detail.
High dividend yields are attractive. They show the potential income an investor can earn from dividends compared to the stock’s price. That said, financial experts have always advised investors to stay away from yield traps, as high yields often signal financial trouble. This is possibly true, but not certain. Various reports have shown how dividend stocks outperformed other asset classes over the years. Newton Investment Management published a report on the subject and revealed that high-yielding dividend stocks outperformed the broader market during high inflationary periods from 1940 to 2021. The report also showed that investment portfolios with high-yield dividend stocks outperformed those with low or zero-dividend stocks in terms of value-weighted performance. High-yield portfolios surpassed the performance of low-yield ones by 199 basis points and zero-yield portfolios by 330 basis points.
That said, high yields should fall within a certain range. For example, analysts generally consider yields between 3% to 7% to be healthy. The health of dividend stocks is generally determined by their cash flow generation and dividend growth over time. Investors prefer stocks that don’t just offer high yields but also maintain or consistently increase their payouts, rather than cutting them frequently. Some of the best dividend stocks like Altria Group, Inc., Verizon Communications Inc., and British American Tobacco p.l.c. boast above-average dividend yields but these companies also hold strong dividend growth streaks.
An American finance company, MSCI also published a detailed report on the historical superior returns of high-yielding stocks. The report mentioned that the high dividend yield strategy excelled in total return and showed lower volatility over the 20 years ending in 2019. It surpassed the basic yield selection by over 100 basis points annually and had 1.3 percentage points less volatility. This approach proved especially resilient during times of economic and market stress, such as the Global Financial Crisis.
While high-dividend stocks are very popular, our research indicates that combining high yields with dividend growth can lead to better returns over time. The High Dividend Growth Index, which tracks the performance of companies with at least five consecutive years of dividend growth with an average yield of 3%, delivered an annual average return of 11.94% from 2010 to 2022, compared with an 11.88% return of the broader market. The index’s dividend growth also exceeded the US long-term inflation rate at 13.8%. The index is up by 4.54% this year so far and its 12-month return came in at 16.4%, as of the close of May 28.
Apart from regular investors, elite money managers are also piling into high-yielding dividend stocks.
Our Methodology:
For this list, we scanned Insider Monkey’s database of 920 hedge funds as of Q1 2024 and picked dividend stocks that have yields above 7%, as of May 28. The stocks are ranked in ascending order of hedge fund investors having stakes in them. 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).
Altria Group, Inc. (NYSE:MO)
Number of Hedge Fund Holders: 38
Dividend Yield as of May 28: 8.62%
Altria Group, Inc. (NYSE:MO) ranks first on our list of the best dividend stocks to buy now. The Virginia-based tobacco company has raised its dividends for 54 consecutive years, with its current quarterly payout of $0.98 per share. The stock has a dividend yield of 8.62%, as of May 28. In the first quarter of 2024, the company reported a strong cash position, returning $1.7 billion to shareholders through dividends.
Altria Group, Inc. (NYSE:MO)’s performance has remained close to that of the broader market this year so far, returning 11.23%. In the last 5 years or so, the stock has underperformed the broader market by a wide margin. However, due to its strong dividend history and impressive dividend yield, investors are loyal to the stock. The stock’s forward P/E ratio currently comes in at 9.16, compared with 21.01 for the broader market, which shows that MO is undervalued relative to the broader market. Despite having strong credentials, the stock could be impacted by the declining volume of cigarettes. That said, Andvari Associates has given a positive outlook on Altria Group, Inc. (NYSE:MO) in its first quarter 2024 investor letter:
“Our second example of a high-yielding security is the stock of Altria Group, Inc. (NYSE:MO). Before we get into the details of why we started a position in Altria, a brief history is in order. The company was formerly known as Philip Morris before rebranding to Altria in 2003. Cynically, the rebranding was to minimize the negative attention from its tobacco business. However, the company also owned Kraft Foods and Miller Brewing, so it was logical to reflect its status as a conglomerate. Since rebranding, Altria has slowly “de-conglomerated”. It spun out Kraft in 2007. It spun out Philip Morris International in 2008. In 2021, it sold its Ste. Michelle Wine Estates business. Finally, last month Altria announced it is selling part of its 10% ownership in Anheuser-Busch InBev (BUD)
Andvari has followed Altria since we began our investment career. Profitability is extraordinary and the business requires minimal capital expenditures. Despite the volume of cigarettes having steadily declined—a great thing for our population health—Altria has still managed to grow revenues and profits with regular price increases…” (Click here to read the full text)
We also agree with the firm, as the company’s rebranding and evolving business models have benefitted it over the years. Altria Group, Inc. (NYSE:MO) spun out Philip Morris International Inc. (NYSE:PM) in 2008 and since then, the stock has returned over 106%.
Insider Monkey’s database of Q1 2024 indicated that 38 hedge funds owned stakes in Altria Group, Inc. (NYSE:MO), compared with 42 in the previous quarter. These stakes are collectively valued at over $823.3 million. Among these hedge funds, Harris Associates was the company’s leading stakeholder in Q1.
Overall, MO ranks first among the best dividend stocks with over 7% dividend yield. You can visit 10 Best Dividend Stocks with over 7% Yield to see other very high dividend yield stocks that are on hedge funds’ radar. While we acknowledge the potential of high dividend stocks, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as Microsoft but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure. None. This article is originally published at Insider Monkey.
