We recently published a list of 10 Stocks That Are Close To Becoming Dividend Aristocrats. In this article, we are going to take a look at where Analog Devices, Inc. (NASDAQ:ADI) stands against the other stocks that are close to becoming dividend aristocrats.

Income investors are drawn to Dividend Aristocrats because these stocks have consistently increased their dividends for decades. However, it’s possible to achieve even better returns by investing in stocks that are on the path to becoming Aristocrats—those that are increasing payouts but haven’t yet reached the 25-year mark required to qualify. This is where the real potential for wealth lies. The downside of some Aristocrats is that their most rewarding growth years may be behind them. Once a company reaches a certain level of dividend stability, its payout ratios can become inflated, and dividend hikes may slow, often limited to modest profit growth.

That said, dividend aristocrats are special. Among the approximately 6,000 stocks listed on the NYSE and NASDAQ, only around 67 companies have earned the distinction of being Dividend Aristocrats. These stocks have consistently outperformed other asset classes over time. Since the inception of the Dividend Aristocrats Index in 2005 through September 2023, it has delivered a total return of 10.35%, outperforming the broader market, which returned 9.54% during the same period.

READ ALSO: Dividend Aristocrats: Top 7 Companies by Yield for November 2024

In recent years, dividend investing has become an increasingly popular strategy, largely due to periods of heightened market volatility. The annual dividend payouts from the broader market have been on the rise, growing from $420 billion in 2017 to $522 billion in 2021. By 2023, these payments reached a record high of $588.2 billion. This trend demonstrates that investing in dividend stocks offers the potential for long-term growth and income generation. In addition, dividends have played a key role in overall market returns. From 2013 to 2022, dividends contributed around 17% of the total return of the broader market, according to a Morgan Stanley report.

While growth tech stocks have been in the spotlight this year, dividend stocks still have the potential to outperform as companies keep raising their payouts. Analysts remain optimistic about the continued growth of dividend stocks. Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indices, made the following comment in this regard:

“Given the FOMC’s interest rate reduction start and record earnings for Q2, and projected record earnings for both Q3 and Q4, companies may be more at ease to commit funds to larger dividend increases. The notable conclusion is that many companies have the ability and cash-flow to increase their dividend payments, but remain concerned over the economy, government spending and taxing policy.”

Analysts support dividend stocks due to their long-term growth potential. When discussing dividend stocks from this aspect, reinvesting dividends is a key strategy for compounding returns over time. From 1978 to 2020, dividends and their reinvestment contributed to 69% of the market’s total returns. This means that a $10,000 investment, with dividends reinvested consistently, would have grown to more than $1.2 million during this period. Given investors’ preference for dividend stocks, many companies have implemented dividend policies and are consistently increasing their payouts with the goal of achieving 25 years of dividend growth.

Our Methodology

For this list, we selected companies from the S&P 500 that have raised their dividends for 18 years or more and are on the steady path to becoming dividend aristocrats. These companies would be achieving their dividend aristocrat status in seven years or less. The stocks are ranked in ascending order of their consecutive years of dividend growth. We also measured hedge fund sentiment around each stock according to Insider Monkey’s database of 900 as of Q3 2024.

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).

Analog Devices, Inc. (NASDAQ:ADI)

Consecutive Years of Dividend Growth: 20 Years

Analog Devices, Inc. (NASDAQ:ADI) is a semiconductor manufacturing company that specializes in integrated circuits and systems. The company caters to a variety of sectors, including industrial, automotive, communications, and consumer applications. Prioritizing innovation, it allocates significant resources to research and development to sustain its technological advantage. The company’s strategy focuses on a customer-first mindset, expanding into new markets through acquisitions, and maintaining a leading position in analog solutions. The stock has delivered an over 12% return to shareholders since the start of 2024.

Analog Devices, Inc. (NASDAQ:ADI) reported strong earnings in fiscal Q4 2024. The company’s revenue for the quarter came in at $2.44 billion, which, though, fell by over 10% on a YoY basis, exceeded analysts’ estimates by over $37.65 million. The company sustained operating margins above 40%, highlighting the resilience of its business model. It also remained committed to strategic, long-term investments in areas such as engineering, manufacturing, and enhancing the overall customer experience.

Analog Devices, Inc.’s (NASDAQ:ADI)  cash position makes it a strong dividend payer. In FY24, the company generated $3.9 billion in operating cash flow and its free cash flow came in at $3.1 billion. Moreover, it returned $2.4 billion to shareholders during the year, including $1.8 billion in dividends. The company has raised its payouts for 20 consecutive years and is just five years away from becoming a dividend aristocrat. It pays a quarterly dividend of $0.92 per share and has a dividend yield of 1.69%, as of December 2.

Insider Monkey’s database of Q3 2024 indicated that 63 hedge funds owned stakes in Analog Devices, Inc. (NASDAQ:ADI), compared with 64 in the preceding quarter. The consolidated value of these stakes is over $4.4 billion. Among these hedge funds, First Eagle Investment Management was the company’s leading stakeholder in Q3.

Overall, ADI ranks 7th on our list of the stocks that are close to becoming dividend aristocrats. While we acknowledge the potential for ADI to grow, 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 ADI but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock. 

READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.

Disclosure: None. This article is originally published at Insider Monkey.