We recently compiled a list of the 10 Very High Yield Dividend Stocks With Upside Potential. In this article, we are going to take a look at where Xerox Holdings Corporation (NASDAQ:XRX) stands against the other stocks with over 8% dividend yield.

High yields have always sparked debate between analysts and investors. Analysts typically advise caution with extremely high yields, while investors often find them attractive. Analysts’ concerns are valid; high yields can sometimes be warning signs of financial instability within a company. Many companies offering exceptionally high yields have been on the brink of cutting or suspending their dividends. That said, no company is completely out of the woods regarding its challenges, and dividend yield plays a minor role in a company’s financial difficulties. In fact, many reports have highlighted that high-yield stocks have performed well over the years.

Newton Investment Management published a report revealing that high-yield 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 no dividend stocks in terms of value-weighted performance. High-yield portfolios outpaced low-yield ones by 199 basis points and zero-yield portfolios by 330 basis points. This outcome is informative, yet it does not provide insights into the market conditions of that time, offering only a general overview of high-yield stock performance. Analysts have been particularly attentive to how dividend stocks perform during periods of market volatility, recognizing that the demand for regular income is most keenly felt during these times. Therefore, analysts recommend considering stocks with high yields only if these companies also demonstrate strong dividend growth streaks.

The S&P High Yield Dividend Aristocrat Index seeks to track the performance of companies with at least 20 consecutive years of dividend growth with an average dividend yield of 3%. According to a report by S&P Dow Jones Indices, in a backdrop of slowing growth but rising inflation, the index achieved a monthly average total return of 0.39% from 1999 through April 2024, surpassing the benchmark by approximately 120 basis points. Historically, inflationary environments have typically benefited short-duration stocks like Dividend Aristocrat companies. During slow growth phases with declining inflation, the performance of the High Yield Dividend Aristocrats has aligned closely with the benchmark. The report further mentioned that the dividend growth rate for the index also surpassed inflation over the long term.

As mentioned above, when investing in dividend stocks, high yield and dividend growth must go hand in hand, as many companies have shown that it is indeed possible. Analysts typically view yields between 3% to 7% as healthy. The health of dividend stocks is often assessed based on their ability to generate cash flow and their track record of dividend growth. Investors favor stocks that not only offer high yields but also maintain or steadily increase their dividend payouts, rather than frequently cutting them. Examples include some of the best dividend stocks such as Altria Group, Inc., Verizon Communications Inc., and British American Tobacco p.l.c. that have above-average dividend yields coupled with robust dividend growth histories. To read more about strong dividend payers, have a look at Best Blue Chip Dividend Stocks To Buy.

Our Methodology:

For this list, we screened for dividend stocks with yields higher than 8% as of July 8. Then, we narrowed down the choices by finding stocks with an upside potential according to analyst predictions. Finally, we selected companies with the most hedge fund investors holding stakes in them, using Insider Monkey’s Q1 2024 database. 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).

Xerox Holdings Corporation (NASDAQ:XRX)

Number of Hedge Fund Holders: 31

Dividend Yield as of July 8: 8.80%

Xerox Holdings Corporation (NASDAQ:XRX) is an American company that develops and manufactures print and digital document products and offers related services. The company faced significant challenges during the pandemic and has struggled to regain its footing. Despite efforts to balance its operations, such as reducing its workforce by 15%, the stock is experiencing consistent losses. Its first-quarter earnings didn’t impress analysts and investors, causing the stock to decline by nearly 40% since the start of 2024. One of the main reasons for the earnings decline is that the company is going through structural changes. The company’s core print business saw a 12.6% year-over-year decline, bringing in $1.43 billion. Despite this, management remains confident that their team and strategy will effectively reinvent the company and meet adjusted operating income goals. They have also reaffirmed their FY24 guidance, projecting an annual revenue decrease of 3% to 5% in constant currency.

Xerox Holdings Corporation (NASDAQ:XRX) currently trades at a forward P/E ratio of 2.98, which indicates a very low valuation. This suggests that it may be undervalued at its current price. However, there is a risk that the valuation could decrease further if the market reacts negatively to the company’s recent earnings miss. Analysts have maintained a consensus Sell rating on the stock with a $14 price target, reflecting an upside potential of 29%.

While Xerox Holdings Corporation (NASDAQ:XRX) is not currently presenting a rosy picture, its cost-cutting initiatives, reliable dividend payments, and positive cash flow guidance provide some relief amidst difficult conditions. For FY24, the company expects to generate approximately $600 million in free cash flow, which is good news for dividend investors. The company has not raised its dividends since 2017 but has maintained regular payments over these years. In fact, given its challenging financial situation, it is commendable that the company did not reduce its payouts during the pandemic. The company offers a quarterly dividend of $0.25 per share. With a dividend yield of 8.80% as of July 8, XRX is one of the best dividend stocks on our list.

Of the 920 hedge funds tracked by Insider Monkey at the end of Q1 2024, 31 funds owned stakes in Xerox Holdings Corporation (NASDAQ:XRX), up from 25 in the previous quarter. These stakes have a collective value of over $88.3 million.

Overall XRX ranks 2nd on our list of the best high yield dividend stocks with upside potential. You can visit 10 Very High Yield Dividend Stocks With Upside Potential to see the other high yield dividend stocks that are on hedge funds’ radar. While we acknowledge the potential of XRX 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 XRX 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.