We recently compiled a list of the 15 Stocks to Invest in with Steady Dividends. In this article, we are going to take a look at where UnitedHealth Group Incorporated (NYSE:UNH) stands against the other dividend stocks.
Dividend stocks, while popular among investors, have been underperforming for a while. Dan Lefkovitz, a strategist at Morningstar Indexes, attributed this lag to a straightforward reason: their limited exposure to the technology sector. Although technology wasn’t the top-performing sector in 2024, it came close and now represents a significant portion of the market.
However, this doesn’t suggest that dividend stocks are fundamentally weak or that they won’t rebound in the future. Alex Bryan, Morningstar’s director of product management for equity indexes, believes that changing market dynamics could benefit dividend investors. Here are some comments from the analyst:
“From a valuation standpoint, dividends look more attractive than they did a year ago, and that’s partially because of the relative underperformance that they’ve had. Bonds are certainly more competitive relative to dividends. But if you look at dividend-paying stocks relative to the rest of the equity markets, I think they’re becoming more attractive relative to other stocks.”
Other analysts also suggested that dividend-paying stocks might stage a comeback in 2025 due to growing investor demand for cash returns. The broader market’s dividend yield fell below 1.19% in 2024, marking a 20-year low, compared to its long-term average of 4.3%. With interest rates recovering on risk-free investments like Treasurys, companies are facing increased competition for yield. As a result, many are raising dividends or initiating them for the first time. Notably, some major tech giants began paying dividends in 2024, signaling to the market their shift toward value positioning within a high-growth sector.
Also read: 10 Best High-Yield Dividend Stocks To Invest In
In 2024, companies in the broader market that paid dividends returned around 35% of their net income and 45% of their free cash flow to shareholders, as reported by Bloomberg. The average dividend yield for these companies was approximately 2.3%, while the market capitalization-weighted yield stood at about 1.5%.
Wolfe Research’s Chief Investment Strategist, Chris Senyek, offers a unique perspective on investing in dividend stocks. While investors typically focus on companies with growing dividends and high yields, Senyek suggested exploring other opportunities. He highlighted companies initiating dividends for the first time and those that have recently reduced their payouts. Initiating a dividend indicates management’s confidence in maintaining steady earnings and cash flow, while also attracting a new group of investors.
Senyek also noted that shares of companies that cut dividends tend to underperform leading up to the cut, perform in line with the market shortly after, and begin to outperform about six months later. The key is to identify companies that may be at risk of cutting dividends and to reconsider those that reduced payouts a few months earlier. To forecast potential cuts, Senyek examines companies with high dividend yields, substantial debt, and elevated payout ratios. For potential new dividend payers, Senyek seeks out companies with robust free cash flow yields that are actively repurchasing shares and maintaining manageable debt levels. In view of this, we will take a look at stocks with steady dividends.
Our Methodology:
For this article, we scanned Insider Monkey’s database of 900 hedge funds as of Q3 2024 and picked dividend stocks with over 10 consecutive years of dividend growth. From this list, we further refined our selection criteria by identifying stocks with a projected upside potential of over 10% based on analyst price targets, as of January 20. 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 senior healthcare professional giving advice to a patient in a clinic.
UnitedHealth Group Incorporated (NYSE:UNH)
Upside Potential as of January 20: 27.5%
UnitedHealth Group Incorporated (NYSE:UNH) is a Minnesota-based health insurance company that offers a wide range of related services to its consumers. The company recently announced its FY24 earnings and surprised investors with its stellar performance. It posted revenue of $400 billion, up 8% from last year. The company experiences this growth due to its expanded services across the organization. The company’s earnings from operations for the year amounted to $32.3 billion. When excluding costs related to the cyberattack response and impacts in South America, adjusted earnings from operations stood at $34.4 billion.
UnitedHealth Group Incorporated (NYSE:UNH) also met investor expectations with its strong cash flow performance. For the full year, the company generated $24.2 billion in cash flows from operations, which is 1.6 times its net income. Throughout 2024, the company returned more than $16 billion to shareholders through dividends and stock buybacks. In the fourth quarter, the company’s return on equity was 23.7%, demonstrating strong, widespread earnings and an efficient capital structure.
UnitedHealth Group Incorporated (NYSE:UNH) holds a solid dividend track record. The company started paying annual dividends in 1990 and shifted to quarterly payouts in 2010. Since then, it has raised its dividends each year, which makes it one of the best stocks with steady dividends. The company offers a per-share dividend of $2.10 every quarter and has a dividend yield of 1.60%, as recorded on January 20.
Vulcan Value Partners mentioned UNH in its Q4 2024 investor letter. Here is what the firm has to say:
“UnitedHealth Group Incorporated (NYSE:UNH), a company that we have owned several times in the past, is the largest health insurer in the United States. UnitedHealth Group also owns Optum, which is a rapidly growing healthcare services company. The environment for the health insurance business remains positive as growth in healthcare spending, driven by chronic diseases and an aging population will continue to outpace overall economic growth. The insurance business benefits from powerful network effects as more members attract more providers and vice versa, which reinforces United’s value proposition and bargaining power with each side of the network. We respect UnitedHealth Group’s management team and have been very pleased with their long-term vision and execution.”
According to Insider Monkey’s database of Q3 2024, 112 hedge funds owned stakes in UnitedHealth Group Incorporated (NYSE:UNH), compared with 114 in the preceding quarter. These stakes are valued at over $15 billion in total.
Overall UNH ranks 2nd on our list of the best dividend stocks with high yields. While we acknowledge the potential for UNH 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 UNH 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.
