In this article, we will take a look at some of the best dividend stocks with over 7% yield according to hedge funds. Though British American Tobacco p.l.c. (NYSE:BTI) ranks 9th on our list of the 10 Best Dividend Stocks with 7+% Yield, we have analyzed the stock in detail.
High dividend yields are attractive. They show the potential income an investor can earn from dividends compared to the stock’s price. That said, financial experts have always advised investors to stay away from yield traps, as high yields often signal financial trouble. This is possibly true, but not certain. Various reports have shown how dividend stocks outperformed other asset classes over the years. Newton Investment Management published a report on the subject and revealed that high-yielding 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 zero-dividend stocks in terms of value-weighted performance. High-yield portfolios surpassed the performance of low-yield ones by 199 basis points and zero-yield portfolios by 330 basis points.
That said, high yields should fall within a certain range. For example, analysts generally consider yields between 3% to 7% to be healthy. The health of dividend stocks is generally determined by their cash flow generation and dividend growth over time. Investors prefer stocks that don’t just offer high yields but also maintain or consistently increase their payouts, rather than cutting them frequently. Some of the best dividend stocks like Altria Group, Inc., Verizon Communications Inc., and British American Tobacco p.l.c. boast above-average dividend yields but these companies also hold strong dividend growth streaks.
An American finance company, MSCI also published a detailed report on the historical superior returns of high-yielding stocks. The report mentioned that the high dividend yield strategy excelled in total return and showed lower volatility over the 20 years ending in 2019. It surpassed the basic yield selection by over 100 basis points annually and had 1.3 percentage points less volatility. This approach proved especially resilient during times of economic and market stress, such as the Global Financial Crisis.
While high-dividend stocks are very popular, our research indicates that combining high yields with dividend growth can lead to better returns over time. The High Dividend Growth Index, which tracks the performance of companies with at least five consecutive years of dividend growth with an average yield of 3%, delivered an annual average return of 11.94% from 2010 to 2022, compared with an 11.88% return of the broader market. The index’s dividend growth also exceeded the US long-term inflation rate at 13.8%. The index is up by 4.54% this year so far and its 12-month return came in at 16.4%, as of the close of May 28.
Apart from regular investors, elite money managers are also piling into high-yielding dividend stocks.
Photo by andres perez on Unsplash
Our Methodology:
For this list, we scanned Insider Monkey’s database of 920 hedge funds as of Q1 2024 and picked dividend stocks that have yields above 7%, as of May 28. 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).
British American Tobacco p.l.c. (NYSE:BTI)
Number of Hedge Fund Holders: 19
Dividend Yield as of May 28: 9.56%
British American Tobacco p.l.c. (NYSE:BTI) is a British multinational company that specializes in the manufacturing and sales of cigarettes, tobacco, and other related products. The tobacco industry has always shown resilience, even during the pandemic of 2020. Even today, companies are bringing out alternatives like vaping as substitutes for tobacco in the face of strict regulations and declining smoking rates. This sets BTI apart from its peers as the company is actively taking steps to introduce ‘reduced risk products’ in the industry. Recently, the company mentioned that it follows the principles of responsible marketing and ensures that its products are intended for adult customers. Bireme Capital initiated its position in British American Tobacco p.l.c. (NYSE:BTI) during the fourth quarter of 2023 due to the company’s strong growth prospects. Here is what the firm has to say BTI in its Q4 2023 investor letter:
“We initiated a new long position in British American Tobacco p.l.c. (NYSE:BTI). While BAT is in the consumer staples industry like some of our shorts, the valuation is vastly different. After falling 25% this year, BAT trades at a mere 6x earnings, and is one of the cheapest stocks we own. This appears to be a case of social conformity bias, as ESG-blinded investors are ignoring the company’s brands, valuation, and strength in next-generation products.
BAT was formed in 1902 and owns some of the most beloved tobacco brands in the world, including Camel, Lucky Strike, Dunhill, and Newport. While tobacco use is on the decline, these brands (via annual price increases), generate a stable 8b GBP in profits. We think the stock is undervalued based on the earnings power of these brands alone…” (Click here to read the full text)
British American Tobacco p.l.c. (NYSE:BTI), one of the best dividend stocks on our list, currently offers a quarterly dividend of $0.7431 per share, having raised it by 6.1% in February this year. As of May 28, the stock has a dividend yield of 9.56%.
As of the close of Q1 2024, 19 hedge funds in Insider Monkey’s database held stakes in British American Tobacco p.l.c. (NYSE:BTI), down from 22 in the previous quarter. The consolidated value of these stakes is over $588.6 million. Ken Griffin was bullish on the stock during the quarter, boosting its stake in the company by 464%.
The stock is up by 2.52% this year so far. BTI trades at nearly 7x of its earnings, which makes it a cheap stock in the consumer staples industry. This is where we usually tell our readers that while we acknowledge the potential of BTI, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. Then we tell them that if they are looking for an AI stock that is more promising than NVIDIA but that trades at less than 5 times its earnings, they should check out our report about the cheapest AI stock. It is true that we have been bullish about AI stocks before everyone else was bullish and we have uncovered an extremely cheap AI stock, however, we also believe BTI is a hidden gem dividend stock because when investors go to BTI’s Yahoo Finance ticker page, all they see is a stock with -$8.21 loss and a P/E ratio of N/A. It isn’t surprising that they are worried about BTI’s ability to make the quarterly dividend payments.
Here is the hidden truth. BTI is a major player in a declining industry. If you live in the US, you won’t see many people smoking and their numbers are dwindling every year. There are more smokers overseas, especially in Europe and Asia (see 20 Most Smoking Countries in Asia), however, the number of smokers is declining everywhere. When a cash rich company like BTI falls in a situation like this, they try to buy their way out by making stupid investments that destroy shareholder value. For example, Altria invested (we call it “wasted”) $12.8 billion on a 35% stake in Juul 6 years ago. BAT did even worse with its “Build a Smokeless World” investment strategy which was focused on transitioning from traditional combustible tobacco products to reduced-risk alternatives. The end result was a “£27.6 billion non-cash impairment charge mainly related to our U.S. business”. In layman’s term a non-cash impairment charge of £27.6 billion is an admission of more than $35 billion wasted on expensive acquisitions and investments.
The good news is that the price was paid by the company’s previous shareholders, not new shareholders. And some of those old shareholders sold their shares after the write-down which caused the BTI’s stock price fall from $43 to $30 today. What those shareholders didn’t recognize was that British American Tobacco’s “less harmful products” like Vuse, the top e-cigarette brand in the U.S., and Velo nicotine pouches, generated one sixth of the company’s revenue in 2023. Remarkably, this segment also achieved profitability, delivering an impressive (but seemingly unnoticeable) $500 million in profit in 2023. This tells us that BTI’s $35 billion write-down is really a “kitchen-sinking”. This is a practice used by companies that disclose a large number of negative items all at once. This may include write-downs, impairments, restructuring costs, and other adverse financial news. The idea is to “clear the decks” and get all the bad news out in a single quarter, allowing the company to move forward with a cleaner slate. This can sometimes be seen as a strategy to reset expectations and manage future investor sentiment, as it consolidates most of the bad news into one period rather than spreading it out over multiple quarters.
If you haven’t clearly understood the above paragraph, please reread again. This implies that this is the right time to finally invest in BTI. We believe over the next quarters you will not only be able to collect a nearly 10% dividend, BTI will probably exceed the rock-bottom expectations and its stock price will gradually recover back to $40. So, in our opinion, BTI is one of the best short-term investments a dividend investor can make. You can buy the stock now at $31, or you can wait, get the confirmation at its next earnings call, and buy the stock at $34 then. By the way, if you don’t want to miss out on our next BTI like investment opportunities, you can subscribe to our free enewsletter on our website and get email alerts.
Overall, BTI ranks 9th among the best dividend stocks with over 7% dividend yield. You can visit 10 Best Dividend Stocks with over 7% Yield to see other very high dividend yield stocks that are on hedge funds’ radar.
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Disclosure. None. This article is originally published at Insider Monkey.