We recently compiled a list of the 10 Extreme Dividend Stocks With Upside Potential. In this article, we are going to take a look at where Park Hotels & Resorts Inc. (NYSE:PK) stands against the other extreme dividend stocks with upside potential.
Investors often prefer high-yielding stocks for immediate returns. However, dividend growth stocks offer more substantial long-term advantages, such as increasing income, capital appreciation, and reduced volatility. While many investors are drawn to the instant rewards of high-yield stocks, it’s important to be cautious with excessively high yields, as they can indicate underlying financial difficulties. Analysts recommend careful consideration when dealing with very high yields. That said, the stock market is a bit of a wild card—past performance isn’t a reliable predictor of future outcomes. While dividend growth equities have provided strong returns in the past, high dividend yield stocks have also performed well, showing robust returns. This is due to the stock market’s inherent volatility—what works at one time may not be as effective later, and the timing of successes is often uncertain.
Also Read: 10 Best Dividend Stocks with Over 9% Yield According to Analysts
Yin Chen and Roni Israelov, in their study Income Illusions: Challenging the High Yield Stock Narrative, published in the March 2024 Journal of Asset Management, divided stocks into high-dividend and low-dividend categories based on their median dividend yield from the previous year. They examined how dividends affected investment returns under different scenarios. Their research spanned from January 1964 to December 2021 and included the top 1,500 U.S. stocks. The high-dividend portfolio outperformed in both returns and risk, achieving an average annual return of 13.8% with 15.6% volatility. In contrast, the low-dividend portfolio delivered lower returns of 11.8% but with significantly higher volatility at 21.9%. This led to a 3.6% difference in the compound annual growth rate. In addition, the high-dividend portfolio experienced smaller drawdowns during market corrections. Despite the high-dividend stocks’ overall superior performance throughout the entire sample period, investing in a long-short portfolio yielded nearly a 1% annual loss from 2003 to 2021, with the best returns occurring between 1983 and 2002.
Studies like these can confuse investors who often believe that high-yield dividend stocks are inherently risky. However, that’s not always the case. When investing in high-yield stocks, it’s important to evaluate several key metrics, such as payout ratios and debt levels. High-yield stocks usually pay out a significant portion of their free cash flow as dividends, resulting in a high payout ratio. They may also use debt to fund these dividends, leading to higher leverage and increased risk. These factors can make high-yield stocks more vulnerable to dividend cuts during tough times, which can reduce income and potentially lead to significant declines in stock prices.
If payout ratios, debt levels, and fundamental metrics align well, investing in high-dividend stocks might not be a poor choice. Analysts have supported these equities, though it depends on specific market conditions. Brian Belski, BMO’s Chief Investment Strategist, has noted that the “indiscriminate selling” of high dividend payers presents a potential opportunity for investors. He pointed out that, over the past thirty years, high dividend-yielding stocks have only underperformed the broader market during two periods: the tech bubble and the pandemic. Belski suggested that such abnormal underperformance often signals a turning point, with these stocks typically experiencing a strong recovery afterward. Historically, they have outperformed the broader market by over 20% on an annualized basis from trough to peak in relative year-over-year returns for nearly a year, and continue to show above-average performance for nearly two years following the peak.
If this situation holds true and the fundamentals continue to be solid, we would be interested in including these equities in our portfolios as well. With that, let’s look at some of the best dividend stocks with upside potential.
Our Methodology:
For this list, we screened for dividend stocks with yields higher than 7% as of August 14. Then, we narrowed down the choices by finding stocks with the highest upside potential according to analysts. Among those stocks, we chose companies that have relatively stable dividend histories, however, a lot of the companies on the list don’t have a consistent record of paying dividends due to their exceptionally high yields. Many of the companies listed below are part of the REIT and energy sectors, as these industries are generally known for their high yields. The stocks are ranked in ascending order of their upside potential, as of August 14.
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A high-end hotel suite with trendy contemporary décor and luxurious amenities.
Park Hotels & Resorts Inc. (NYSE:PK)
Upside Potential as of August 14: 37.6%
Dividend Yield as of August 14: 7.19%
Park Hotels & Resorts Inc. (NYSE:PK) is an American real estate investment trust company that mainly invests in hotel properties. The company encountered some difficulties in its business travel segment during the pandemic, but the latest quarterly earnings reveal encouraging results. The company has seen growing demand as business travel picks up and group demand remains strong, particularly at its resort hotels and certain urban locations. In fact, comparable group revenues for the second quarter of 2024 rose by nearly 8% compared to the previous year. The stock delivered a nearly 12% return in the past 12 months.
Seeing strong momentum in its different segments, Park Hotels & Resorts Inc. (NYSE:PK) is also moving forward with capital investments. Looking ahead, the company has outlined its plans for capital investments in 2024, projecting expenditures between $270 million and $290 million. Of this amount, $51 million was allocated during the second quarter of the year. The company is focusing on several key renovation and return-on-investment projects.
Vulcan Value Partners also highlighted the company’s business in its Q4 2023 investor letter. Here is what the firm has to say:
“Park Hotels & Resorts Inc. (NYSE:PK) is a real estate investment trust (REIT) that owns a number of Hilton’s flagship properties including the Hilton Hawaiian Village and the New York Hilton. The company reported a solid quarter. Importantly, the company decided in June to return its two large hotels in San Francisco to the debt holders, and in October, they were placed into court-ordered receivership. The process has now reached a point where the company no longer has any financial obligation to these properties. As a result, the company’s balance sheet has been strengthened. The company also repurchased 3% of shares outstanding and announced its intention to pay a special dividend in the fourth quarter. We are pleased that the market has begun to appreciate the value of Park Hotels, and we think its shares remain discounted.”
Park Hotels & Resorts Inc. (NYSE:PK) has been distributing dividends to shareholders since it spun off from Hilton Worldwide in 2017, although it temporarily halted payments for nearly two years in 2020 due to the pandemic. currently, it offers a quarterly dividend of $0.25 per share, having raised it by 67% in February this year. The company aims for a payout ratio between 65% and 70% of Adjusted FFO per share for the entire year. According to the company’s current guidance, this strategy suggests an additional top-off dividend will be declared in the fourth quarter of 2024. With a dividend yield of 7.2% as of August 14, PK is one of the best dividend stocks on our list.
Overall PK ranks 3rd on our list of the extreme dividend stocks with upside potential. While we acknowledge the potential of PK 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 PK 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.
