In this article we provide the list of 10 best dividend stocks for passive income.
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.
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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:
10 – Cullen/Frost Bankers Inc. (NYSE:CFR)
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.
9 – Cincinnati Financial (NASDAQ:CINF)
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…”
8 – Black Hills Corp. (NYSE:BKH)
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.
7 – Leggett & Platt Inc. (NYSE: LEG)
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.
6 – Essex Property Trust (NYSE: ESS)
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.
5 – Sysco Corp. (NYSE: SYY)
Sysco is the global leader in selling, marketing and distribution of food products to restaurants, healthcare and educational facilities, lodging establishments and other customers who prepares meals away from home. As it is expected, due to Covid-19 the company’s sales and revenues took a dive. In the financial statements following note takes place: “The COVID-19 pandemic is more widespread and longer in duration than historical disasters impacting our business, and it is possible that actual uncollectible amounts will differ, and additional charges may be required.” When this problem addressed, I do expect a recovery.
Now that we have 3 different vaccine candidates showing at least 70% efficacy, it is time to get back in recovery stocks like Sysco. The company has a 2.57% dividend yield and it increase its dividend from $0.39 to $0.45 last year. The company may not be able to increase its dividend at the same rate next year, but analysts are optimistic about 2022. When it comes to the number of hedge funds, there are 33 managers who were invested in this stock at the end of September.
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4 – General Dynamics (NYSE: GD)
At the fourth place is a company from the Aerospace & Defense Industry. Although Covid-19 had adverse effects on this industry, the company managed to limit the damage. Company’s chairman and CEO, Phebe N. Novakovic stated that: “… we continue to reduce debt and invest in the company for future growth.” Oakmark Funds is bullish about GD. Here is what they said in their 2020 Q2 investor letter:
““General Dynamics is one of the leading U.S. defense contractors and controls the world’s premier business jet franchise (Gulfstream). Short-term fears that the coronavirus will hurt demand for business jets drove down the share price, so we were able to purchase this high-quality business at a large discount to both its historical and peer valuation levels. Taking a longer term view, we believe the company is poised to benefit from new product introductions within its business jet division, an improvement in free cash flow conversion and a highly visible, decade-long increase in deliveries of next generation nuclear-powered submarines. As these positives come into clearer view, we believe the discount to intrinsic value will close.”
GD shares currently trade at $148.36 and have a trailing P/E of 13.5. This figure is also the lowest in our list. The stock’s current quarterly dividend is $1.10 corresponding to an annualized dividend yield of nearly 3%. Compared to the previous period, dividend payout was bumped up by 7.8%. There were a total of 37 hedge funds with long positions in the stock at the end of September.
3 – Chevron Corp. (NYSE: CVX)
Chevron is one of the world’s leading integrated energy companies. Its main operations focus on “explore for, produce and transport crude oil and natural gas; refine, market and distribute transportation fuels and lubricants; manufacture and sell petrochemicals and additives; and develop and deploy technologies that enhance business value.” Without a doubt lockdowns and slumping demand due to Covid-19 had drastic effects on the company’s sales, but still 43 big hedge funds took bullish positions in this company.
The best time to invest in oil stocks was three weeks ago, before the announcement of vaccine news. However, we aren’t too late. Chevron shares increased about 40%, but there is still room for an additional 20% increase over the next 12 months. While you wait, you will receive quarterly dividend payments of $1.29, corresponding to a 6% annualized dividend yield. Chevron managed to increase its dividends for 33 consecutive years.
If we look closer to top three funds that have strong positions at Chevron, we see Fisher Asset Management at the first spot. Billionaire Ken Fisher is one of the most well-known money managers in the financial world and had round $390 million worth of position in CVX. Kahn Brothers and Diamond Hill Capital also have large positions in the stock.
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2 – ExxonMobil Corp. (NYSE: XOM)
““The stock of Exxon Mobil continued to struggle in the third quarter, and it lost roughly half its market cap year to date. Despite this, we believed Exxon Mobil was well-equipped to contend with lower prices and remained a compelling investment. The company demonstrated high levels of operational flexibility during the difficult market environment and maintained an upward drift in earnings power. Its high-quality, long-duration assets occupy attractive positions on the cost curve.”
Indeed, the large decline in XOM shares resulted in a double digit dividend yield earlier this year. ExxonMobil has successfully increased its dividend for 37 consecutive years. Current dividend for the third quarter of this year is $0.87 per share, and that makes a 9.42% dividend yield in annualized terms. This number is the highest yield offered by the companies featured in this article. We agree with First Eagle. Exxon shares offer a large upside over the next 12 months.
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1 – PepsiCo Inc. (NASDAQ: PEP)
In 1965, Pepsi-Cola and Frito-Lay merged to deliver their products under a single company. Their products are enjoyed by consumers in more than 200 countries and territories around the globe. Did you know that PepsiCo spun off Kentucky Fried Chicken, Taco Bell and Pizza Hut in 1997?During the first 9 months of 2020, PepsiCo generated almost $48 billion in revenues, $5.28 billion in net income, and $3.79 net income per share.
From the recent financials, the following statement was interesting: “Additionally, our industry continues to be affected by disruption of the retail landscape, including the rapid growth in sales through e-commerce websites and mobile commerce applications, including through subscription services, the integration of physical and digital operations among retailers and the international expansion of hard discounters. We have seen and expect to continue to see a further shift to e-commerce, online-to-offline, and other online purchasing by consumers as a result of the COVID-19 pandemic.” This explains the strong revenues and cash flow in spite of the difficult conditions that we face.
On 20th November 2020, the share price was $143.42. At the end of the third quarter there were 52 big hedge funds positioned in this stock. Among these asset managers Donald Yacktman’s Yacktman Asset Management sits at the top spot. Pepsi is also a favorite of several quant hedge funds like AQR Capital Management.
Current dividend for the company is $1.02 and in annualized terms that corresponds to a 2.85% dividend yield. Compared to the previous period, dividend payout was increased by 7.07% (from $0.9550 to $1.0225). PepsiCo Inc. increased its dividends for 48 consecutive years.
Please also see 10 best dividend stocks to buy according to billionaire Ken Fisher and 10 best high dividend stocks to buy.
Disclosure: None.
Disclosure: 10 best dividend stocks to buy for passive income is originally published at Insider Monkey.
