In this article, we will take a look at some of the best dividend stocks with over 7% yield according to hedge funds. Though The Western Union Company (NYSE:WU) ranks fifth 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.
Speedcurve Performance Analytics
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).
The Western Union Company (NYSE:WU)
Number of Hedge Fund Holders: 29
Dividend Yield as of May 28: 7.37%
The Western Union Company (NYSE:WU) is a Colorado-based financial services company that mainly specializes in payment services. The company seems to be in a favorable position to experience growth as immigration rates increase and globalization advances. In the first quarter of 2024, the company reported a 6% year-over-year growth in revenue of its Consumer Money Transfer segment. In addition, its transactions also increased by 6% from the same period last year. The stock is currently trading at approximately 8 times its earnings over the past year, which is cheap for the company with stable cash flows and solid dividend yield. The stock declined by over 9% in the fourth quarter of 2023 due to various macroeconomic challenges. Ariel Investments highlighted some reasons for the stock’s drop during the quarter in its Q4 2023 investor letter.
“Global leader in money transfer services, The Western Union Company (NYSE:WU), traded lower in the period, despite the delivery of solid earnings and a subsequent raise in full year guidance. These results were aided by regulatory change in Iraq and margin expansion in the retail business. Meanwhile, management continues to make progress executing on its Evolve 2025 Strategy and continues to return capital to shareholders through dividends and share repurchases. Although the company anticipates the macroeconomic environment will continue to slow, it reminded investors remittances have proved resilient in prior periods of economic contraction. At current levels, WU is trading at a discount to our estimate of private market value.”
That said, the stock has bounced back since then and has gained 4.70% in 2024 so far. Western Union faces intense competition from fintech companies like PayPal, Square, and others that offer faster, cheaper, and more convenient digital payment solutions. The rise of blockchain and cryptocurrency-based transfer services also poses a significant threat to traditional money transfer businesses. While we acknowledge the allure of Western Union to dividend investors, 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 more promising than NVIDIA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
On May 17, The Western Union Company (NYSE:WU) declared a quarterly dividend of $0.235 per share, which was in line with its previous dividend. It is one of the best dividend stocks on our list as the company has been paying regular dividends to shareholders since 2006. The stock’s dividend yield on May 28 came in at 7.37%.
As of the end of March 2024, 29 hedge funds tracked by Insider Monkey held stakes in The Western Union Company (NYSE:WU), down from 30 in the preceding quarter. The total value of these stakes is over $418.2 million. Ken Griffin was one of the company’s leading stakeholders in Q1, increasing his position in the company by 169%.
Overall, WU ranks 5th 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.
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Disclosure. None. This article is originally published at Insider Monkey.
