We recently compiled a list of the 12 Best Dividend Stocks Under $25. In this article, we are going to take a look at where KeyCorp (NYSE:KEY) stands against the other dividend stocks under $25.

Dividend stocks have remained important for investors, standing the test of time regardless of the market conditions. Dividends have historically contributed approximately one-third of the market’s total return since 1960. Among dividend strategies, investors tend to favor those that emphasize dividend growth over high yield. One of the main reasons for this inclination is that as these companies show more tangible results, investors gain confidence from seeing improvements in free cash flow, earnings, and dividend growth during a recovery, compared to more speculative options. In addition, as interest rates decrease with Federal Reserve rate cuts in an economic recovery, yield-oriented investors shift their investments from cash to dividend-paying stocks.

According to analysts, due to volatile economic conditions since 2020 and ongoing market uncertainties affecting corporate earnings, high-yielding companies lacking strong financial stability and discipline may face challenges sustaining future dividend payouts. These companies could be vulnerable to potential dividend cuts or suspensions. On the other hand, dividend growth strategies have demonstrated their effectiveness in both rising and falling interest rate periods. The Dividend Aristocrats index, which tracks the performance of companies with at least 25 consecutive years of dividend growth, delivered a 14.26% return during the falling interest rates period between May 2005 and March 2024, while high dividend stocks underperformed with over 10% return, according to a report ProShares. Similarly, in the rising interest rates period between this timeframe, dividend growers returned 10.26%, with high dividend stocks returning 9.22%. To learn more about dividend growth stocks, readers should have a look at Dividend Zombies and Kings with Longest Dividend Payouts. 

Dividend growth strategies offer potential solutions to the challenges faced by high dividend-paying stocks in a rising-rate environment in two main ways. By prioritizing dividend increases over high yields, dividend growth stocks are less influenced by the value factor, which typically affects high dividend payers. This resilience allows dividend growth stocks to perform better in growth-oriented markets.

Given investors’ penchant for dividend-paying companies, businesses worldwide are consistently rewarding shareholders with dividends. According to Janus Henderson, dividends rose by 5% in 2023 to $1.66 trillion, marking the third consecutive year of record highs following a brief dip in payouts during the pandemic in 2020. The fund manager expects total dividends to reach a new peak of $1.72 trillion, reflecting a 3.9% increase on a headline basis. The payments indicate that balance sheets remain strong, despite a global economic downturn and increased costs associated with servicing debt. It also underscores the advantages for the banking sector of higher interest rates. Nearly half of last year’s dividend growth came from banks, which rewarded shareholders after experiencing a significant increase in profits from lending activities.

Our Methodology:

For this list, we used a stock screener to find dividend stocks trading below $25 as of June 21. From the initial list, we selected companies with dividend yields above 2% and a history of regular dividend payments, indicating sustainable dividends. Finally, we narrowed it down to 12 stocks that had the highest number of hedge fund investors, as tracked by Insider Monkey in Q1 2024. Hedge funds aren’t dividend investors; they invest in stocks for capital gains. Essentially, our list presents the best dividend stocks under $25 that have the potential to deliver large capital gains. 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).

KeyCorp (NYSE:KEY)

Number of Hedge Fund Holders: 46

Share Price as of June 21: $13.5

KeyCorp (NYSE:KEY) is an American retail banking company that offers a wide range of retail and commercial banking services to its consumers. In the first quarter of 2024, the company’s net interest income (NII) fell by over 20% compared to the last year and 4.5% from the previous quarter. This decline is due to the company’s past decisions regarding balance sheet management. While management expects NII to be lower for the entire year, they believe the second half to be much stronger than the first. This improvement will mainly come from the increased benefits of short-duration swaps and maturing Treasuries that can be repriced.

That said, overall fees grew by 6% from the previous quarter and YoY, mainly driven by KeyCorp (NYSE:KEY)’s record-breaking first-quarter investment banking fees. Analysts expect investment banking revenue to reach $600 million to $650 million for the year, with $170 million coming from this quarter alone. The company continues to excel in targeting its investments and growth opportunities and is on track to maintain stable expenses for the third consecutive year by the end of 2024.

Diamond Hill Capital also presented a positive stance on KeyCorp (NYSE:KEY)’s growth in the coming quarters in its Q1 2024 investor letter. Here is what the firm has to say:

“Portfolio activity has remained modest as valuations have risen, and it is increasingly challenging to find high-quality companies trading at interesting valuations. However, we did identify two new investments in Q1: Sysco Corporation and KeyCorp (NYSE:KEY).

Retail and commercial bank KeyCorp is a high-quality financial institution that we believe is trading at a discounted valuation. Over the next several years, we expect KeyCorp will generate improved returns and tangible book value growth as net interest margins expand and Treasurys on its balance sheet mature. We also anticipate positive loan growth following a period of balance sheet optimization and improvements among its unrealized losses as the company’s securities portfolio increases in value.”

KeyCorp (NYSE:KEY), one of the best dividend stocks on our list, has been paying regular dividends to shareholders since 1985. The company currently pays a quarterly dividend of $0.205 per share and supports a dividend yield of 5.89%, as of June 21.

At the end of Q1 2024, 46 hedge funds in Insider Monkey’s database owned stakes in KeyCorp (NYSE:KEY), down from 49 in the previous quarter. These stakes have a total value of more than $745 million.

Overall KEY ranks 2nd on our list of the best dividend stocks to buy under $25. You can visit 12 Best Dividend Stocks Under $25 to see the other dividend stocks that are on hedge funds’ radar. While we acknowledge the potential of KEY as an investment, our conviction lies in the belief that some deeply undervalued dividend stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued dividend stock that is more promising than KEY but that trades at less than 7 times its earnings and yields nearly 10%, check out our report about the dirt cheap dividend stock.

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Disclosure: None. This article is originally published at Insider Monkey.