In this article, we will take a look at some of the best dividend stocks with over 7% yield according to hedge funds. Though NextEra Energy Partners, LP (NYSE:NEP) ranks 10th 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.
Photo by Annie Spratt on Unsplash
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).
NextEra Energy Partners, LP (NYSE:NEP)
Number of Hedge Fund Holders: 18
Dividend Yield as of May 28: 10.48%
NextEra Energy Partners, LP (NYSE:NEP) is a Florida-based master limited partnership (MLP) that specializes in the acquisition of clean energy projects. On April 25, the company declared a 1.4% hike in its quarterly dividend to $0.8925 per share. It has been growing its dividends every quarter since 2015, which makes NEP one of the best dividend stocks on our list. The stock has a dividend yield of 1.048%, as of May 28.
In the first quarter of 2024, NextEra Energy Partners, LP (NYSE:NEP) reported revenue of $257 million, up from $254 million during the same period last year. The company’s operating cash flow for the quarter came in at $78 million. It expects to grow its dividend at an annual average growth rate of between 5% and 8% through 2026, aiming for a consistent growth rate of 6%.
At the end of Q1 2024, 18 hedge funds tracked by Insider Monkey reported having stakes in NextEra Energy Partners, LP (NYSE:NEP), which remained unchanged from the previous quarter. These stakes have a collective value of over $148.7 million.
NextEra Energy Partners, LP (NYSE:NEP) benefits from its parent company, NextEra Energy, Inc. (NYSE:NEE), which is one of the largest utility companies in the US. The MLP mainly profits from the acquisition of renewable energy assets through drop-downs from its parent company. The sale of these clean energy assets allows the company to diversify its portfolios and engage in growth opportunities. This helps the company with its cash flow generation, enabling it to offer optimistic forecasts regarding its distribution per unit in the coming years. Moreover, with growing investments in renewable energy, the stock could generate sustainable returns for investors. Since the start of 2024, NEP has surged by 10.37%, as of the close of May 28.
However, the stock has a trailing twelve-month (TTM) P/E ratio of 25.5, compared with a 14.55 TTM P/E ratio of Chevron Corporation (NYSE:CVX). CVX has gained over 79% since Warren Buffet started investing in the company during the third quarter of 2020, whereas NEP has declined by over 37% during this period. While we might not be inclined to invest heavily in NEP based on its current returns, the company’s growth prospects make it a consideration for investment.
Overall, NEP ranks 10th 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.
