We recently published a list of the 8 Best Dividend Leaders to Buy According to Wall Street Analysts. In this article, we are going to take a look at where The Kraft Heinz Company (NASDAQ:KHC) stands against the other best dividend leaders to buy.
Investors have long been drawn to dividend stocks due to their financial stability and impressive returns, which have consistently outperformed other asset classes over the years. While these stocks may be underperforming at the moment, their long-term returns make them an attractive choice for investors. This means that building wealth through dividends requires patience, as the rewards accumulate over time rather than delivering instant results. The long-term performance of dividend stocks highlights their importance. According to a report by Hartford Funds, over the past several decades, dividends have been a major contributor to investor returns. Since 1960, reinvested dividends and the power of compounding have accounted for 85% of the cumulative total return of the broader market. The report also mentioned that in the 1940s, 1960s, and 1970s—periods when total returns were below 10%—dividends made a significant contribution to overall returns.
Investors often gravitate toward dividend-paying stocks during market downturns or periods of economic uncertainty. Companies with substantial payouts, such as those in utilities and consumer staples, are known for generating consistent earnings regardless of market conditions. However, during market rallies, these stocks typically underperform. This trend has been particularly noticeable since 2020, as mega-tech stocks have frequently driven the market to record highs.
Chris O’Keefe, a portfolio manager at Logan Capital Management, suggested that the growing performance gap between the broader market and dividend stocks this year presents an ideal opportunity for investors to consider buying dividend stocks. In addition to O’Keefe, several analysts are urging investors to focus on dividend stocks, citing their favorable outlook. The Dividend Aristocrats Index, which tracks 66 companies that have consistently increased their dividends annually for the past 25 years, has struggled to keep up with the broader market since 2020. Dividend-paying stocks experienced a resurgence in 2022, as recession fears prompted investors to turn to stable sectors like utilities and consumer goods. However, the rebound was short-lived. By 2023, rising interest rates pushed bond and money-market returns higher than dividend yields, leading major companies to adopt a cautious approach and tighten cash reserves amid economic uncertainty. This year, many of the same leading stocks from the Covid era have once again propelled the market to record highs.
The Dividend Aristocrats Index has risen nearly 5% since the beginning of 2024, while the broader market has returned 24%. Despite underperforming, dividend stocks remain a preferred choice for investors. A Morningstar report revealed that US exchange-traded funds (ETFs) focused on dividends held nearly $500 billion in investor assets by the fourth quarter of 2024, with additional billions in actively managed equity income funds. These funds have seen inflows this year, though much smaller compared to the $70 billion they attracted in 2022, which was a strong year for dividends.
Bank of America analyst Ohsung Kwon believes a resurgence in dividend stocks could be on the horizon. His team anticipates that the companies in the broader market will collectively boost their dividend payouts by 10% in 2025, driven by investor demand for cash. Reflecting this trend, even major tech firms have begun distributing dividends.
A closeup of an assembly line worker inspecting a newly produced jar of condiments and sauces.
Our Methodology
For this list, we scanned holdings of First Trust Morningstar Dividend Leaders Index Fund (FDL), which tracks the performance of the 100 highest-yielding stocks with consistent growth in dividends and can maintain their dividends in the future. From this list, we further refined our selection criteria by identifying stocks with a projected upside potential of over 15% based on analyst price targets, as of December 19. 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).
The Kraft Heinz Company (NASDAQ:KHC)
Upside Potential as of December 19: 19.4%
With an upside potential of 19.4%, The Kraft Heinz Company (NASDAQ:KHC) ranks sixth on our list of the best dividend leaders. The American multinational food company specializes in a wide range of snacks and beverages. The company, formed through the 2015 merger of Kraft and Heinz, has not achieved the expected results from the merger. As a result, it is now refocusing its strategy by eliminating underperforming products and concentrating on its core offerings. Despite these challenges, income investors can take comfort in the company’s strong cash position. In its latest quarter, Kraft Heinz demonstrated solid cash generation, with year-to-date operating cash flow increasing by 6.7% to $2.8 billion compared to the previous year. Free cash flow reached $2 billion, reflecting a 9.7% year-over-year growth. Moreover, the company returned $1.5 billion to shareholders through dividends in the first nine months of the year.
Overall, The Kraft Heinz Company (NASDAQ:KHC) posted mixed earnings, continuing to fall short of analysts’ estimates. It reported $6.38 billion in revenue, marking a 2.85% decline from the same period last year. However, the company saw an improvement in its gross profit margin, which rose by 20 basis points to 34.2%. Kraft Heinz remains focused on investing in marketing, research and development, and technology to provide value-driven solutions for consumers and support future revenue growth. These efforts are bolstered by the company’s ability to optimize operations and maintain strong cash flow. Furthermore, it is committed to expanding both its established and emerging food and beverage brands on a global scale.
Mairs & Power also highlighted efforts made by The Kraft Heinz Company (NASDAQ:KHC) in its Q3 2024 investor letter. Here is what the firm has to say:
“We added The Kraft Heinz Company (NASDAQ:KHC) to the Fund in the quarter. Kraft Heinz is a leading global food company which possesses a portfolio of iconic brands, including its eponymous ketchup brand. The company has been undergoing an operational transformation focused on driving efficiency gains in supply chain, manufacturing and distribution. These efficiency gains have fueled increased investments in technology, automation, innovation and marketing, which should ultimately drive more consistent organic revenue growth and high single digit earnings per share growth. We expect above-average long-term returns, buoyed by consistent free cash flow generation, opportunistic share repurchases and an attractive 4-5% dividend yield. A modest current valuation affords an ample margin of safety.”
The Kraft Heinz Company (NASDAQ:KHC) currently pays a quarterly dividend of $0.40 per share and has a dividend yield of 5.32%, as recorded on December 19.
As of the close of Q3 2024, 38 hedge funds in Insider Monkey’s database held stakes in The Kraft Heinz Company (NASDAQ:KHC), compared with 43 in the preceding quarter. These stakes have a total value of over $12 billion. With nearly 326 million shares, Berkshire Hathaway was the company’s leading stakeholder in Q3.
Overall, KHC ranks 6th on our list of the best dividend leaders according to analysts. While we acknowledge the potential for KHC to grow, 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 KHC 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.