As the world has witnessed a tremendous change in the last half century, financial sector also took its fair share from it and has evolved drastically. Naturally, we tried continuously to adopt to change, if not to conquer it. These changes affected our daily life, habits and the way we act, including the decisions we made for our investments.
There have been many surveys and research on the question of “Was life better in the old days?”. Needless to say, on this discussion both sides may have valid arguments and I am not intended to dwell on it here. But it is sure that; many things have completely disappeared, while some have augmented or changed shape. And due to this change a lot of novelties came up as by-products. Investment rituals and decision-making process are not exceptions to that. Even in the last two decades many complex instruments and assets have been introduced to the markets. Financial knowledge switched from basic algebra to rocket science and engineering. There are thousands of companies and dozens of instruments to invest.
In the good old days, investing in savings accounts or long-term bonds were probably the best thing to do for low risk and steady returns. And letting your savings grow passively via compound interest was the right investment strategy. However, today short-term interest rates are near zero and risk-free assets aren't really risk free anymore. Long-term government bonds can deliver large "real" losses if inflation picks up in the future. This means income investors need an active strategy to manage their funds. We believe dividend stocks with long histories of dividend increases year in year out are the best alternative for passive income investors.
In this article we will present you the top 10 stocks from the U.S. Dividend Champions that have been increasing their dividends annually for the last 25 years. This is a necessary condition if you are looking for regular and consistently growing passive income, but we are going to impose additional criteria to identify the best dividend stocks for passive income. First, we added two more filters: at least 3% annual yield and at least an annual increase of 5% in dividend payout. The results were impressive, but one more touch was needed to rank 10 best dividend stocks. We counted the number of bullish hedge fund positions in each stock and used this statistics to identify the best dividend stock for passive income. Most hedge funds don't invest in dividend stocks for their dividend yield. Hedge funds invest in stocks with huge upside potential. Once in a while some of these stocks happen to be high dividend stocks that have been increasing their dividend payouts consistently. By investing in these dividend stocks we not only hope to capture increasing annual dividend payments but also large capital gains.
By the way Insider Monkey has been very successful at identifying stocks with high upside potential using hedge fund sentiment data. Our monthly newsletter's stock picks returned 113% since March 2017 and outperformed the S&P 500 Index by more than 66 percentage points (see the details here). Some of the stocks we picked in our monthly newsletter were dividend stocks that delivered triple digit returns over the last 4 years.
Having said that, now let’s have a closer look to 10 best dividend stocks for passive income:
The list starts with a financial holding company headquartered in San Antonio. Cullen/Frost Bankers has managed to enter our best dividend stocks for passive income list despite its relatively small market cap. As of this year's third quarter report, CFR had $40.1 billion in assets, which makes it one of the 50 largest banks in the United States. CFR provides a wide range of banking, investments and insurance services to businesses and individuals across Texas and has a presence in the market since 1868.
CFR shares currently trade for $83.16 and have a trailing P/E of 15.6. Current dividend yield is 3.42% and CFR's board last month approved to increase its quarterly dividend to $0.72 from $0.71. We believe CFR's board is a bit cautious right now because of the coronavirus pandemic. In 2019 the board increased the quarterly dividend from $0.67 to $0.71. We believe the growth rate in quarterly dividend will pick up again in 2021. Although financial results of the first nine month of 2020 are worse than the 2019 figures, the CEO of the company Phil Green states that: “Maintaining the philosophy and culture along with the sustainable, organic growth is a positive development in this unusual environment.” There were a total of 19 big hedge funds with bullish CFR positions at the end of September. The number of bullish hedge funds in CFR was only 13 at the end of June.
The stock at the ninth spot in our list is also from the financial sector and it is Cincinnati Financial (CINF). But it is in the insurance branch, rather than banking. And the other similarity is the number of hedge funds that picked this stock in the third quarter, which is also 19.
Cincinnati Financial had a $60.57 book value per share on September 30, 2020 and currently trade for $77.40. Based on this figure CINF's trailing P/E ratio is 16. The stock pays a quarterly dividend of $$0.60 (increased from $0.56 earlier this year) and yields 3.10%. Although Income Statement figures for the three months ended in September are promising, nine months figure are still in the negative territory. Company’s chairman, president and CEO Steven J. Johnston commented: “… along with multiple hurricanes and wildfires, brought considerable loses to our policyholders. Confident in our balance sheet and risk management decisions, we were able to focus on what was important: outstanding claims service. Catastrophe events in the third quarter nearly tripled our 10-year average of 6.2 points. Elevated catastrophe losses alone explain the decrease in non-GAAP operating income…”
The Black Hills Corporation conducts operations in the Electric - Gas Utilities, Power Generation and Mining segments. Among these operations the first two segments accounted for more than 90% of total revenues. The company was founded in 1883 and has increased its dividends for 50 consecutive years. I think that’s really remarkable. The company's current quarterly dividend payment is $0.565 corresponding to an annualized dividend yield of 3.65%. The company increased its quarterly dividend by 5.61% earlier this year.
There were a total of 22 hedge funds with bullish positions in this stock. Billionaire Jim Simons' quant hedge fund Renaissance Technologies had the biggest position in BKH among the 800+ hedge funds tracked by Insider Monkey. BKH is also favored by other quant hedge funds like DE Shaw and Two Sigma. Both funds are among the top 10 hedge fund holders of BKH's stock.
This company also has deep roots. The Leggett & Platt Inc. was founded in 1883 to produce bedspring with the goal of offering the best sleep yet available. After a little bit of search, I realized that the modern growth era for the company goes back to 1960’s. Due to a strategy change, the company has assumed a leading role in manufacturing, marketing, and distribution capabilities on the consumer discretionary sector.
As of this year's third quarter, Leggett & Platt had $4,663.8 million in total assets. When it comes to liabilities; short term debt comprises 20% of total assets, while long term debt covers the 52% of it. As a result, total equity with 28% share makes the financing side look balanced. Current dividend for the company is $0.40 and in annualized terms that corresponds to a 3.68% dividend yield. Dividend amount has increased 5.26% compared to the previous period. There were 26 hedge fund managers who found this stock worth investing. Among these 26 hedge funds Scopus Asset Management has a distant leading position.
Essex operates in the real estate sector. The company has been increasing its dividend payments annually for the last 26 years. Essex is a real estate investment trust (REIT) that acquires, develops, redevelops and manages multifamily apartment communities in supply constrained markets.
On 20th November 2020, the share price was $254.10 and P/E ratio in trailing twelve-month basis was 27.83. From the latest financial reports, I found out that the company “repurchased 121,260 shares of common stock totaling $26.6 million at an average price of $219.24 per share, inline with the stock buyback program.” Current dividend for the company is $2.08 and in annualized terms that corresponds to a 3.27% dividend yield. Compared to the previous period, quarterly dividend payment increased 6.54%. There were a total of 28 hedge funds with bullish ESS positions at the end of September.
