In this article, we discuss the best stocks for a dividend stock portfolio.
Investment trends have been shifting steadily in line with market movements. Technology stocks have become the focal point, outpacing all other asset classes. Moreover, dividend stocks are gaining traction with investors due to their capacity to provide steady income. While these stocks are trailing behind the broader market, the inclusion of major tech companies in the dividend space has sparked enthusiasm among financial experts regarding the future of dividend investing. Retail investors are also on the lookout for reliable income sources, reinforcing this trend. According to a report by JPMorgan Chase, non-professional investors now account for a larger portion of the US options market than ever before, with a particular focus on short-term trades and a preference for technology stocks. In June, retail traders set a new record by contributing 18.3% of all options activity. Over 60% of their trades involved contracts set to expire within a week or less, with tech options being the most popular choice in individual stock trades.
A Forbes report highlighted that retail trading hit a peak in 2023, making up around 23% of the trading volume during one week early in the year. This demonstrates that the influence of retail investors extends beyond the meme stock craze. The report, which also referenced data from the Federal Reserve System, noted that despite recession concerns, median net worth jumped 37% between 2019 and 2022, marking a record increase. As a result, more people became active in the stock market.
Retail investors, much like experienced investors, are increasingly drawn to dividend stocks due to the growing interest in them. When investing in dividend stocks, investors tend to favor high-quality companies—those with a strong history of regularly raising their dividends. Experts have observed that the Dividend Aristocrats index, which tracks firms with a minimum of 25 consecutive years of dividend growth, has delivered better performance than the broader market over time. Dan Lefkovitz, a strategist for Morningstar Indexes, also favored dividend stocks in the current market environment. Here are some comments from the analyst:
“Investing in dividend-paying stocks is a good way to participate in equities over the long term. There have been long stretches when the dividend-paying section of the market has outperformed. Eventually, they’ll come back into favor. Dividend-paying stocks have a value bias. To the extent that there’s a rotation away from technology and growth into the value side of the market and more old economy sectors, that’s going to benefit the dividend-paying portion of the market.”
Despite underperforming last year, global companies still delivered record dividends to shareholders. Income investors worldwide saw a particularly strong second quarter in 2024. According to the latest Janus Henderson Global Dividend Index report, payouts increased by 5.8% on a headline basis, reaching an all-time high of US$606.1 billion. The underlying growth was even more robust at 8.2%, once the impact of exchange rates, especially the weak Japanese yen, was factored in. Following this strong performance and accounting for the significant contributions from new dividend payers this year, Janus Henderson has upgraded its 2024 dividend forecast. The global dividend distribution is now projected to reach US$1.74 trillion, reflecting a 6.4% underlying growth compared to 2023 (up from the previously expected 5.0%) and a headline rise of 4.7% (up from 3.9%). With this, we will discuss some of the best dividend stocks for a dividend stock portfolio.
Our Methodology:
For this list, we carefully examined popular Reddit trading forums such as r/dividends, r/WallStreetBets, r/stocks, and r/trading, where everyday investors discuss and exchange investment ideas. After conducting comprehensive research and analysis, we selected 20 dividend stocks that were getting a lot of attention on Reddit as of September 21. From this group, we chose 15 stocks that had the most hedge fund investors, as tracked by Insider Monkey, during the second quarter of 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).
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8. United Parcel Service, Inc. (NYSE:UPS)
Number of Hedge Fund Holders: 44
United Parcel Service, Inc. (NYSE:UPS) is an American multinational shipping and supply chain management company that offers various related services to its consumers. The company has struggled to adjust to a shifting business landscape, marked by lower shipping demand and growing inflationary pressures. It failed to meet high-growth expectations as market analysts observed a drop in package volumes. Furthermore, rising fuel and labor costs put pressure on profit margins, negatively affecting earnings. In the second quarter of 2024, the company generated $21.8 billion, which fell by 1.07% from the same period last year. Its operating profit also declined by 30% YoY at $1.9 billion.
Analysts are reconsidering their outlook on the company due to its current challenges. ClearBridge Investments also decreased its position in United Parcel Service, Inc. (NYSE:UPS) in the second quarter of 2024 and made the following comment in its Q2 2024 investor letter:
“Our industrials holdings weighed on relative performance as we are more exposed to transports such as “less than truckload” provider XPO and parcel delivery company United Parcel Service, Inc. (NYSE:UPS), which are struggling with weak volumes during the post-COVID freight recession. With industry volumes down to pre-COVID levels and strong pricing power in the LTL space in particular, we believe that the next upcycle will prove to be very strong for earnings. As a result, we added to XPO in the quarter while reducing our position in UPS on concerns that industry capacity remains excessive. Meanwhile, we have less exposure to electrical equipment stocks, which have been rewarded by views that they will benefit from the buildout of AI data centers.”
That said, United Parcel Service, Inc. (NYSE:UPS) is popular among the Reddit community because of its strong dividend history. In the past five years, the company has raised its payouts at an annual average rate of nearly 12%. Moreover, its cash position has also attracted the attention of retail investors. In the first six months of the year, the company reported an operating cash flow of $5.3 billion and its free cash flow amounted to $3.3 billion. Due to its strong cash generation, the company was able to raise its dividend payouts for 22 years straight. It currently offers a quarterly dividend of $1.63 per share for a dividend yield of 5.07%, as of September 21. It is among the best stocks for a dividend stock portfolio.
At the end of Q2 2024, 44 hedge funds tracked by Insider Monkey reported having stakes in United Parcel Service, Inc. (NYSE:UPS), up from 43 in the previous quarter. These stakes have a total value of more than $1.3 billion. With 2.6 million shares, Marshall Wace LLP was the company’s largest stakeholder in Q2.
7. Caterpillar Inc. (NYSE:CAT)
Number of Hedge Fund Holders: 49
Caterpillar Inc. (NYSE:CAT) is a Texas-based company that specializes in construction, mining, and other engineering equipment. The company has gained popularity among retail investors due to its broad range of businesses and consistent revenue growth. Since the start of 2024, CAT has surged over 26%, fueled by its engagement in emerging economic trends like the energy transition, which has positively impacted sales. Additionally, the company’s embrace of technology, including e-commerce and digital tools, has helped strengthen its stable revenue from services.
Caterpillar Inc. (NYSE:CAT) is also benefitting a lot from the housing market. Diamond Hill Capital also highlighted this in its Q1 2024 investor letter:
“Other top contributors included Allstate, Caterpillar Inc. (NYSE:CAT) and General Motors. Shares of heavy construction machinery manufacturer Caterpillar benefited from a positive US housing market, which despite rising interest rates, is seeing strong demand in the face of relatively short housing supply.”
Caterpillar Inc. (NYSE:CAT) has maintained a strong cash position over the years. In the second quarter of 2024, the company’s enterprise operating cash flow came in at $3 billion. It ended the quarter with $4.3 billion available in cash. The company returned $0.6 billion to shareholders through dividends during the quarter, showing its commitment to investors.
One of the best stocks for a dividend stock portfolio, Caterpillar Inc. (NYSE:CAT) has been growing its dividends for the past 30 years. In the past five years, it has raised its payouts at an annual average rate of over 8%. Currently, it pays a quarterly dividend of $1.41 per share and supports a dividend yield of 1.53%, as of September 21.
As of the close of Q2 2024, 49 hedge funds, up from 45 in the previous quarter, owned stakes in Caterpillar Inc. (NYSE:CAT), as per Insider Monkey’s database. These stakes have a consolidated value of $6.4 billion.
6. International Business Machines Corporation (NYSE:IBM)
Number of Hedge Fund Holders: 54
International Business Machines Corporation (NYSE:IBM) ranks sixth on our list of the best stocks for a dividend stock portfolio. The company is well-liked by Reddit users for its flexibility and ability to adjust when industries and market demands shift, demonstrating its ability to remain relevant in today’s market.
International Business Machines Corporation (NYSE:IBM) is now focused primarily on artificial intelligence (AI) and cloud computing. Under the leadership of CEO Arvind Krishna, who took charge in 2020 and shifted the company’s focus to these areas, IBM has seen steady revenue growth. The company stands out by providing a full technology stack through its Watsonx platform, coupled with consulting services for deploying and managing generative AI. Although its stock underperformed over the past decade, its strong presence in the AI space is fueling notable gains this year. The stock has surged by nearly 35% in 2024 so far.
In the second quarter of 2024, International Business Machines Corporation (NYSE:IBM) generated $15.7 billion in revenues, up 2% from the same period last year. The revenue also beat analysts’ expectations by over $147 million. The company also showed a strong cash position, with $6.2 billion in operating cash flow in the first six months of the year. During this period, its free cash flow came in at $4.5 billion. Following the results from the first half of the year, the company has raised its full-year projection for free cash flow, now expecting it to surpass $12 billion.
International Business Machines Corporation (NYSE:IBM) currently offers a quarterly dividend of $1.67 per share, having raised it by 0.6% in April this year. This marked the company’s 29th consecutive year of dividend growth, which makes it one of the best stocks for a dividend stock portfolio. It paid $1.5 billion to shareholders through dividends in the most recent quarter. The stock has a dividend yield of 3.07%, as reported on September 21.
Insider Monkey’s database of Q2 2024 indicated that 54 hedge funds owned stakes in International Business Machines Corporation (NYSE:IBM), up from 49 in the previous quarter. These stakes are worth $838 million in total. Among these hedge funds, Cliff Asness’ AQR Capital Management was the company’s leading stakeholder in Q2.