During a time of great excitement about AI-driven capital gains, it's crucial to remember that dividends have consistently played a vital role in total returns. Over the long term, dividends become even more significant. Looking back at the past few decades, approximately 55% of market returns from 1987 to the end of 2023 have come from reinvested dividends.
Dividends are a long-term investment strategy, and the benefits take time to materialize. For example, a dollar invested in the broader market in 1927 without reinvesting dividends would be worth $243 today, but if dividends were reinvested, that same dollar would be worth $3,737. Fortunately, you don’t need a century to see the potential growth in dividend stocks, as the outlook for the near future is improving. According to a report by AGF Investments, in the second half of 2024, global monetary easing has led to lower bond yields, making fixed income less attractive compared to dividend-paying stocks. In addition, companies with high dividend payouts often have more leverage, and lower bond yields help them manage interest expenses, boosting their overall financial performance, which in turn would contribute to dividend growth.
According to a report by J.P. Morgan, global equities are on the brink of a significant period of dividend growth, not just due to a cyclical rise in payouts but also because of a more permanent increase in dividend momentum. Over the past two decades, global dividends per share have grown at an annual rate of 5.6%, but J.P. Morgan’s analysts now predict this rate will accelerate to 7.6% in the future.
The main factor driving this increased dividend growth is the low starting point for payout ratios (dividends relative to earnings). In 2020, during the pandemic, an unusual number of companies reduced their dividends. In fact, global dividends dropped by 12%, a sharper decline than during the Global Financial Crisis. This response was reasonable given the uncertain environment.
Since then, equity markets have rebounded strongly, with earnings surging, particularly from Big Tech and, more recently, AI. Dividends, typically set by cautious boards, tend to lag behind earnings during these surges. As a result, payout ratios are now close to 25-year lows, meaning companies are paying out less than historical averages, as reported by J.P. Morgan. Simply returning to more typical payout levels could result in an additional 2% growth annually over the next five years. This recovery is already taking shape, as global dividend growth has outpaced earnings growth in seven of the past eight quarters.
Investors and analysts both support companies that have raised their payouts. Companies that consistently raise their dividends typically manage economic downturns better because they have strong business models, solid balance sheets, and promising earnings potential. These qualities make them attractive to investors, and historical data shows that the market tends to reward them. Stocks of companies that increase dividends often outperform the broader market while experiencing lower volatility. According to a report by AGF Investments, the companies in the broader market that grew their dividend between January 1990 and August 2024 grew by 12.1%, compared with an 11% return of companies that pay no dividends and a 10.8% return of dividend cutters. With market conditions improving, it's not surprising that an increasing number of companies are beginning to pay dividends.
Our Methodology:
To compile this article, we first scanned a list of stocks known for their consistent dividend track records and sustained shareholder payouts over an extended period. This group reflects stability and long-term performance in dividend payouts. From this list, we picked 10 companies with the highest number of hedge fund investors, according to Insider Monkey's database of Q3 2024. The stocks are ranked in ascending order of the number of hedge funds 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).
Is Walmart Inc. (WMT) the Best Defensive Stock to Buy Right Now?
A manager standing in a hypermarket, pointing out items available for wholesale.
Walmart Inc. (NYSE:WMT) is an American retail corporation, based in Arkansas. The company operates a chain of hypermarkets, discount stores, and grocery stores across the US. The company is strengthening its digital presence, driving revenue through membership fees, commissions from third-party sellers on its online platform, and advertising payments from businesses looking to engage its customer base. This expansion in higher-margin digital services is playing a key role in increasing the company’s operating income.
Walmart Inc. (NYSE:WMT) is successfully utilizing Generative AI to improve both customer interactions and operational efficiency. Its AI-powered tool, My Assistant, has already supported over 50,000 employees by answering more than 1.5 million inquiries since its introduction. As engagement continues to rise, the company has expanded My Assistant’s availability to 13 more countries.
Walmart Inc. (NYSE:WMT), one of the most promising dividend stocks, maintains a strong cash position. In the first nine months of 2024, the company generated $22.9 billion in operating cash flow, $3. billion higher than the previous year. Its free cash flow also grew by $1.9 billion to $6.2 billion during this period. This cash position enabled the company to raise its payouts for 51 consecutive years. The company's quarterly dividend comes in at $0.2075 per share and has a dividend yield of 0.85%, as of January 30.
As per Insider Monkey’s database of Q3 2024, 88 hedge funds held stakes in Walmart Inc. (NYSE:WMT), compared with 95 in the previous quarter. These stakes have a consolidated value of over $9.7 billion.
Overall WMT ranks 5th on our list of the most promising dividend stocks according to hedge funds. While we acknowledge the potential for WMT as an investment, 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 WMT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
