In this article, we will take a look at some of the best dividend stocks with over 7% yield according to hedge funds. Though Enterprise Products Partners L.P. (NYSE:EPD) ranks sixth on our list of the 10 Best Dividend Stocks with 7+% Yield, 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.
Image by Steve Buissinne from Pixabay
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).
Enterprise Products Partners L.P. (NYSE:EPD)
Number of Hedge Fund Holders: 23
Dividend Yield as of May 28: 7.34%
Enterprise Products Partners L.P. (NYSE:EPD) is next on our list of the best dividend stocks with over 7% yield. The Texas-based midstream natural gas and crude oil pipeline company has been rewarding shareholders with growing dividends for the past 25 years. Currently, it pays a quarterly dividend of $0.515 per share and has a dividend yield of 7.34%, as recorded on May 28.
Enterprise Products Partners L.P. (NYSE:EPD)’s cash position remained strong in the first quarter of 2024 with its distributable cash flow of $1.9 billion. The company generated $2.1 billion in adjusted cash flow from operations (CFFO), up from $2 billion during the same period last year. Its dividend payments appear secure, given that its payout ratio was 56% of its Adjusted (CFFO).
Following a period of decline, the energy sector has regained momentum this year. Enterprise Products Partners L.P. (NYSE:EPD) is consistently taking advantage of the growing production of both crude oil and natural gas. The company reported pipeline volumes for natural gas liquids, crude oil, refined products, and petrochemicals amounted to 7.4 million barrels per day (BPD), up from 7.1 million BPD in the prior year period. Moreover, Enterprise Products Partners L.P. (NYSE:EPD) is continually dedicating resources to follow growth opportunities. For 2024 and 2025, the company expects its growth capital investments within the range of $3.25 billion to $3.75 billion. The stock has a forward P/E ratio of 10.54, compared with an industry average of 12.13. Given its recent strong results and solid earnings outlook, we consider EPD undervalued at its current share price.
According to Insider Monkey’s database of Q1 2024, 23 hedge funds held stakes in Enterprise Products Partners L.P. (NYSE:EPD), the same as in the previous quarter. The consolidated value of these stakes is nearly $310 million.
Overall, EPD ranks 6th 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.
