We recently published a list of 10 Best Dividend Stocks Yielding at Least 7% According to Analysts. In this article, we are going to take a look at where Dow Inc. (NYSE:DOW) stands against other best dividend stocks yielding at least 7% according to analysts.
Investors focused on dividends should be cautious about simply selecting stocks with the highest yields, as this approach can be risky. An unusually high yield often signals potential trouble, since dividend yields rise when stock prices fall. In many cases, an exceptionally high yield may be the result of a stock experiencing a significant decline in value. When a company’s share price drops sharply, it raises concerns about whether its dividend payments can be maintained at their current levels.
Dan Lefkovitz, a strategist for Morningstar Indexes, made the following comment about extremely high yields in the firm’s recent report:
“It’s really critical to be selective when it comes to buying dividend-paying stocks and chasing yield. Looking for the most yield-rich areas of the market can often lead you into troubled areas and dividend traps—companies that have a nice-looking yield that is ultimately unsustainable. You have to screen for dividend durability and reliability going forward.”
However, this has not always been the case. Many companies have maintained strong dividend yields along with consistent dividend growth histories. In addition, high yields are not inherently negative. In fact, dividend yield is a key factor in dividend investing, as it indicates the income an investor can expect relative to the stock’s price.
To fully capitalize on high-yield stocks, investors should also evaluate other metrics such as cash flow, payout ratio, and dividend growth. When these fundamentals are strong, high-yield stocks can remain attractive. Some studies highlight the long-term benefits of high-yield stocks, suggesting that as dividend yields rise, overall returns tend to increase while risk declines. Research from Hartford Funds, which considered annualized standard deviation as a measure of return volatility, found that between December 1969 and March 2024, high-dividend portfolios achieved an annualized return of 12.3%, compared to 10.5% for mid-dividend portfolios and 9.7% for low-dividend portfolios. The respective annualized standard deviations were 14.1%, 16%, and 20.8%, indicating that higher-yield portfolios experienced lower historical risk.
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In addition, a company’s dividend payout ratio serves as an important indicator of its capacity to manage its dividend policy. Firms that only just cover their dividends or allocate most of their earnings to dividends could face risks due to competitive pressures, as their cash flow might not be sufficient to meet operational needs. Companies with high payout ratios may experience slower growth in the future, which could affect both their stock price appreciation and their ability to increase dividends. A study by Nuveen, covering the period from December 2003 to December 2023, found that companies with the highest payout ratios have not been the strongest long-term performers. In contrast, companies with medium to medium-high payout ratios tended to perform better over time. This suggests that companies with strong balance sheets and solid fundamentals make for more promising dividend investments in a portfolio.
Our Methodology
For this list, we screened for dividend stocks with yields higher than 7% as of February 5. From this group, we further refined our selection criteria by identifying stocks with a projected upside potential of over 6% based on analyst price targets, as of February 5. The stocks are ranked according to their upside potential. We also considered hedge fund sentiment around each stock using Insider Monkey’s data for 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).
A technician operating state of the art machines manufacturing specialized packaging materials.
Dow Inc. (NYSE:DOW)
Upside Potential as of February 5: 19.9%
Dividend Yield as of February 5: 7.32%
Dow Inc. (NYSE:DOW) is an American multinational chemicals company that mainly operates in the material science industry and is involved in the manufacturing and marketing of a wide range of chemical, plastic, and agricultural products.
Dow Inc. (NYSE:DOW) recently announced its Q4 2024 earnings, reporting revenue of $10.4 billion, down 2% from the same period last year. Despite ongoing macroeconomic challenges, the company achieved a 1% increase in volume compared to the same period last year, marking its fifth consecutive quarter of year-over-year volume growth. This growth was driven by strong demand for high-value applications and the company’s cost-advantaged operations across various regions. In addition, in December, the company finalized an agreement to sell a minority stake in select US Gulf Coast infrastructure assets, a move expected to generate up to approximately $3 billion in cash proceeds.
Dow Inc. (NYSE:DOW) is structured around three main segments: packaging and specialty plastics, industrial intermediates and infrastructure, and performance materials and coatings. Similar to businesses in other commodity-driven industries like oil, gas, and gold mining, Dow has no influence over market prices for raw materials. Instead, its focus remains on cost management and optimizing production efficiency to maintain competitiveness.
Dow Inc. (NYSE:DOW) is a strong dividend company with a stable cash position. In the most recent quarter, the company reported an operating cash flow of $811 million. Moreover, it returned $492 million to shareholders through dividends. It is one of the best dividend stocks on our list as the company has been making regular dividend payments to shareholders since 1912. It offers a quarterly dividend of $0.70 per share and has a dividend yield of 7.32%, as of February 5.
According to Insider Monkey’s database of Q3 2024, 31 hedge funds owned stakes in Dow Inc. (NYSE:DOW), compared with 32 in the previous quarter. The overall value of these stakes is more than $1.2 billion.
Overall, DOW ranks 2nd on our list of best dividend stocks yielding at least 7% according to analysts. While we acknowledge the potential for DOW as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than DOW 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.