We recently compiled a list of the 7 Best Stocks to Invest in for Medium Term. In this article, we will look at where S&P Global Inc. (NYSE:SPGI) ranks among the best stocks to invest in for the medium term.
On September 18, the Federal Reserve reduced its policy rate by 50 basis points, lowering it to 4.75%–5.00% from 5.25%–5.50%. Following the announcement, stocks surged, with the broader market hitting a new intra-day all-time high and closing at its 39th record of 2024, marking the first since mid-July. The index has risen over 20% since the beginning of the year. The interest rate reduction has created new opportunities for investors, signaling a shift towards a more supportive monetary policy intended to boost economic activity. Lower interest rates generally result in reduced borrowing costs, encouraging both business expansion and consumer spending. This fosters a favorable environment, making medium-term investments, typically ranging from 3 to 5 years, more appealing.
To effectively execute this strategy, investors should evaluate several key factors in the companies they select. These include the stock’s performance over the past year, profitability, sales figures, debt levels, price-to-earnings ratio, and dividends. Additionally, assessing revenue growth and payout ratios can provide further insights.
Dividend stocks are often seen as good choices for medium-term investments, providing investors with passive income while they hold the stock. In addition, dividend-paying companies can be a smart investment during times of market volatility. A report by Hartford Funds showed that from 1940 to 2023, dividend income contributed an average of 34% to the total return of the broader market. The report also highlighted that in decades with total returns below 10%—such as the 1940s, 1960s, and 1970s—dividends made a significant impact on overall returns.
Dividend growth is the most favored approach within dividend investing, as it boosts investors’ income over time. Kirsten Cabacungan, an investment strategist in the Chief Investment Office for Merrill and Bank of America Private Bank, emphasized the significance of dividend growth strategies in investment planning. Here are some comments from the analyst:
“Generally, it’s larger, more mature companies that return capital to their shareholders in the form of dividends. Companies that have consistently increased their dividends tend to be more stable, higher quality businesses, which historically have weathered downturns and are more likely to have the ability to pay dividends consistently.”
A company’s dividend payout ratio is a crucial measure of its ability to maintain dividend flexibility. Firms that allocate most or all of their earnings to dividends may struggle under competitive pressure, as their cash flow might not be enough to sustain operations. A report by Nuveen highlighted that, historically, stocks with the highest payout ratios haven’t delivered the best long-term results. Instead, companies with moderate to moderately high payout ratios have tended to outperform over the past two decades among dividend-paying stocks. With this, we will now discuss some of the best stocks to buy for medium term.
Our Methodology:
For this list, we used a Finviz screener to to find dividend stocks with an average revenue growth of over 10% over the past five years, highlighting companies with consistent sales growth. From that selection, stocks with a five-year average payout ratio of under 40% were chosen, indicating a strong cash position. The final list includes 7 companies with the highest number of hedge fund investors, based on Insider Monkey’s Q2 2024 database.
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).
S&P Global Inc. (NYSE:SPGI)
Number of Hedge Fund Holders: 90
5-Year Average Annual Revenue Growth Rate: 14.83%
5-Year Average Payout Ratio: 31.7%
S&P Global Inc. (NYSE:SPGI) is a New York-based capital market company that specializes in financial information and analytics. The company’s performance remained strong in the second quarter of 2024, reporting $3.55 billion in revenues, up 14.5% from the same period last year. The company has raised its FY24 guidance across several key areas, particularly impressing investors with its cash flow outlook. It now anticipates generating $4.4 billion in operating cash flow, up from the previous estimate of $4.2 billion. In addition, it projects adjusted free cash flow to reach $4.7 billion, an increase from the earlier forecast of $4.5 billion. This revision is due to higher expected net income. The company also plans to maintain its commitment to shareholders, aiming to return about 85% of its adjusted free cash flow in 2024 through dividends and share buybacks.
It is clear why S&P Global Inc. (NYSE:SPGI) is confident in its cash flow outlook, as the company has already demonstrated strong cash generation in the first half of the year. Its operating cash flow for the period came in at $2.5 billion, which grew significantly from $1.36 billion in the prior year period. The company’s dividend history is also very strong as it has raised its payouts for 51 years in a row. With a 5-year average payout ratio of 31.7%, SPGI is one of the best stocks to buy for medium term. The company pays a quarterly dividend of $0.91 per share and has a dividend yield of 0.69%, as of September 19.
At the end of Q2 2024, 90 hedge funds tracked by Insider Monkey held stakes in S&P Global Inc. (NYSE:SPGI), compared with 97 in the previous quarter. These stakes are worth more than $10 billion in total. Among these hedge funds, TCI Fund Management was the company’s leading stakeholder in Q2.
Overall, SPGI ranks 5th on our list of the best stocks to invest in for medium term. While we acknowledge the potential of SPGI 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 timeframe. If you are looking for an AI stock that is more promising than SPGI but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.