There is a lot of debate around the merits and long-term viability of dividend investing. The crux of this debate is this: a dividend is not free money. In reality it is a transfer of money from a company to you. That comes at a cost. For example, let’s say a company is worth $1000 with 100 shares ($10 per share). Say this company is paying a dividend of $1 per share. When this dividend is paid, the company’s worth actually declines by $100 ($1/share * 100 shares). So the total value of the company is now $900. Dividend investing is based on a trade-off. Instead of putting money into long-term growth projects that will drive its stock price higher and increase returns, a company might decide to start paying back its shareholders. Usually, companies that are offering consistent dividend are mature, with little long-term growth prospects. On the other hand, famous companies with explosive growth prospects don’t offer any dividends (think Alphabet, Facebook, Amazon, Biogen, Tesla). But the core of the argument against dividend investing stands on a key assumption: dividend stocks are not investing enough for their future growth. The answer to this argument lies in understanding a key financial metric known as payout ratio.
Why Prefer Dividend Stocks with Low Payout Ratios?
That’s why in this article we are going to talk about only those high-yield stocks that have payout ratios of 100% or less. A low payout ratio is a positive signal and shows that the company is reinvesting a major chunk of its earnings into expanding operations. If a stock has a payout ratio of over 100%, it’s a red flag as it shows the company’s dividend could be unsustainable in the longer run. A payout ratio of over 100% shows that a company is paying a dividend more than its earnings can support.
The Rising Appeal of Dividend Stocks
Despite all the skepticism around dividend and income investing, the appeal of high-yield dividend stocks with strong track record is growing. With a raging pandemic worldwide, increasing economic volatility rising and uncertainty in financial markets, investors have started to prefer stocks that pay steady streams of income. The Federal Reserve’s decision to keep the interest rates low is also increasing the attraction of dividend stocks.
Lenox Wealth Advisors’ David Carter said in an interview that collecting dividend payments from quality stocks is a solid way to increase your returns and financial positions, especially when the markets are uncertain “We’re actually buying a lot more dividend stocks now. In a world of slow economic growth and political uncertainty, we’re trying to find ways to generate returns,” Carter said.
Investors are rapidly diversifying their income streams to hedge against the rising volatility. Even the smart money is not safe from the risks. The hedge fund industry’s reputation has been tarnished in the last decade during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 88 percentage points since March 2017. We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
Dividend stocks as a whole are consistently posting stronger returns when compared to the broader market. Heartland Advisors in a detailed study utilized monthly and annual value-weighted total returns of non-dividend stocks and dividend stocks from a period of 1928 through 2019. The study divides major U.S. companies into quintiles by dividend yield. The conclusion shows that the second-highest-yielding group beat the market most consistently each year over several decades.
Let's start out list of 10 Best High Yield Stocks To Buy Now. Note that all hedge fund data is based on the exclusive group of 800+ funds tracked by Insider Monkey as part of our market-beating investment strategy. We choose only those dividend stocks that have a yield of over 5% and a payout ratio of 100% or less.
10. Plains All American Pipeline, L.P. (NASDAQ: PAA)
Dividend Yield: 8.06%
Payout Ratio: 28.69% (Trailing 12 Months of Earnings)
Texas-based Plain All American Pipeline offers services in oil pipeline transportation, marketing, storage, LPG and natural gas sectors in the U.S. and Canada. In December 2020, the company switched from NYSE to The Nasdaq Global Select Market to reduce costs. In November 2020, PAA stock rallied after the company announced a 500 million stock repurchase program and also posted better-than-expected Q3 results.
A total of 8 funds tracked by Insider Monkey held stakes in Plains All American at the end of the third quarter.
9. Universal Corp (NYSE: UVV)
Dividend Yield: 6.53%
Payout Ratio: 100.8%
Virginia-based Universal is a tobacco products company. It processes flue-cured and burley tobacco. The company has a major stake in oriental leaf tobacco company Socotab, LLC. Major tobacco player Altria Group is one of the biggest customers of UVV. In the second quarter, non-GAAP EPS totaled $0.37. Revenue in the period declined by over 20% to $377.03 million.
Universal is one of the 10 best high yield stocks to buy now. Overall, 12 hedge funds tracked by Insider Monkey held stakes in UVV at the end of September 2020.
8. Brandywine Realty Trust (NYSE: BDN)
Dividend Yield: 6.62%
Payout Ratio: 42.94%
Pennsylvania-based Brandywine Realty Trust is REIT that primarily invests in office buildings in Philadelphia, Washington, D.C., and Austin. As of the end of 2019, the company owned stakes in 173 properties containing 24.3 million net rentable square feet. Brandywine Realty Trust reported FFO of $0.36 in the fourth quarter, in-line with the Street’s estimates. Revenue in the period slid over 13% to $126.82 million, missing the Street’s forecast by $1.42 million.
A total of 14 hedge funds tracked by Insider Monkey entered the fourth quarter with BDN shares on their portfolios. Among these hedge funds is Israel Englander’s Millennium Management, which increased its hold in the company by over 4000% in the third quarter.
7. PPL Corp (NYSE: PPL)
Dividend Yield: 5.96%
Payout Ratio: 82.46%
Pennsylvania-based PPL provides electricity to about 10 million customers in Pennsylvania, Kentucky, and the United Kingdom. It controls about 8,000 MW of regulated electric generating capacity in Kentucky. In January 2021, the stock came to the spotlight amid news that it could become a potential takeover target after selling its U.K. electric distribution network operator PPD.
A total of 21 hedge funds tracked by Insider Monkey held stakes in the company at the end of the third quarter.
6.Navient Corp (NASDAQ: NAVI)
Dividend Yield: 5.15%
Payout Ratio: 30.19%
Delaware-based Navient services and collects student loans. The company was formed in 2014 following the split of Sallie Mae into two distinct entities, Sallie Mae Bank and Navient. The company services about 25% of the total student loans in the U.S. In January 2021, the company said it earned $0.97 in the fourth quarter, above the Street’s estimate of $0.83 cents.
As of the end of the third quarter, 22 hedge funds tracked by Insider Monkey were long NAVI, down from 27 funds a quarter earlier.
5. Artisan Partners Asset Management Inc (NYSE: APAM)
Dividend Yield: 5.78%
Payout Ratio: 82.06%
Wisconsin-based Artisan Partners Asset Management Inc (NYSE: APAM) offers investment management services to businesses, mutual funds and various pooled investment vehicles. It also provides equity investment advice and fixed income strategies. Earlier in February, the company posted its Q4 non-GAAP EPS of $1.06, beating the Wall Street estimates by $0.05. GAAP EPS in the period totaled $1.15, above the consensus by $0.13. Revenue in the period jumped 25% to reach $261.1 million, beating the analysts’ forecasts by $4.77 million.
A total of 26 hedge funds tracked by Insider Monkey were bullish APAM at the end of the September quarter, up from 21 funds a quarter earlier.
4. New York Community Bancorp, Inc. (NYSE: NYCB)
Dividend Yield: 6.52%
Payout Ratio: 66.6%
New York Community Bancorp is one of the largest banks in the U.S. It offers multi-family or commercial loans mainly in the New York area. The bank announced a CEO transition in December 2020. In the fourth quarter, NYCB posted its Q4 non-GAAP EPS of $0.27, beating the Street’s estimates by $0.01. Revenue in the period increased by over 24% to $322.95 million, above the consensus by $9.9 million.
Ken Griffin’s Citadel Investment Group increased its hold in NYCB by 40% in the third quarter, ending the period with 11.28 million shares of the company. The fund owns 11.28 million shares of the company. Overall, 28 hedge funds in Insider Monkey’s database of 816 funds are bullish on the company.
3. Centurylink Inc (NYSE: LUMN)
Dividend Yield: 8.18%
Payout Ratio: 84.03%
Louisiana-based CenturyLink, also known as Lumen Technologies, provides services and products for communications, network services, security, cloud solutions and voice. The Fortune 500 company has a vital role to play in the growing communications sector, as its key equipment for local and long-distance voice, Multi-Protocol Label Switching (MPLS), Cloud hosting, data center and integration is used worldwide.
Mason Hawkins’ Southeastern Asset Management is one of the 31 hedge funds tracked by Insider Monkey having stakes in LUMN at the end of the third quarter. The fund owns over 62 million shares of the company.
2. Prudential Financial Inc (NYSE: PRU)
Dividend Yield: 5.49%
Payout Ratio: 37.64% (Trailing 12 Months of Earnings)
New Jersey-based Prudential Financial ranks 53 on the Fortune 500 list. The company offers insurance, investment management services and various financial products to retail and institutional customers in the U.S. and 40 countries. The company has over $1.4 trillion worth of assets.
Earlier in February, the company announced plans to return up to $10 billion of capital to its stockholders via dividends and share repurchases over a period of three years. The company said it will resume its stock buyback program in the first quarter of 2021. In the fourth quarter, Prudential’s adjusted EPS came in at $2.93, easily beating the Wall Street forecast of $2.57.
The company is also getting the attention of the smart money, as 34 hedge funds tracked by Insider Monkey reported owning stakes in the company at the end of the third quarter, up from 26 funds a quarter earlier.
1. Brookfield Property Reit Inc Class A (NASDAQ: BPYU)
Dividend Yield: 7.48%
Payout Ratio: 8.41% (Based on Cash Flow)
Brookfield Property ranks 1st on the list of 10 best high yield stocks to buy now. It is a commercial real estate company that provides services related to operation, development and management of retail and other rental properties. The company owns about 122 retail properties in the U.S. Earlier in February, the company said it completed $1.37 billion of gross asset dispositions. The company said that it was encouraged by the recovery in the private market activity in the fourth quarter.
As of the end of the third quarter, 35 hedge funds tracked by Insider Monkey held stakes in the company. The total value of these stakes is $1.1 billion.