We recently published a list of 10 Best Dividend Stocks Under $5. In this article, we are going to take a look at where The Cato Corporation (NYSE:CATO) stands against the other dividend stocks under $5.

Dividends have consistently been a strong source of returns over time. These stocks hold both theoretical and practical significance in assessing stock values. Although dividend stocks have underperformed the broader market in recent years, their long-term performance remains steady.

Since the beginning of 2024, the Dividend Aristocrats Index—which monitors companies that have consistently raised their dividends for at least 25 consecutive years—has yielded returns of over 8% for investors. However, this performance has fallen short compared to the broader market, which has surged by nearly 19% during the same period. Despite this shortfall, 2024 has been a favorable year for dividends overall. This improvement is largely attributable to several major technology firms, previously known for not paying dividends, announcing the start of their dividend programs. Moreover, these companies have collectively distributed billions in their inaugural dividend payments.

Also read: 12 Best Dividend Stocks For Steady Growth

The long-term performance of dividend stocks also takes into account periods of high interest rates, during which other asset classes typically experience declines. This doesn’t imply that dividend stocks only perform well during episodes of high interest rates. While there isn’t a clear connection between their performance and interest rates, historical data shows that they tend to remain relatively stable regardless of the rate environment. For instance, in certain periods of rising US interest rates, such as the mid-1970s, dividend-paying stocks outperformed the broader market. Conversely, as rates decreased from the mid-1980s to the mid-1990s, the performance of high-yield stocks relative to the market remained relatively stable. Even if we set aside historical data and concentrate on more recent performance, we find that elevated interest rates did not have any serious impact on the performance of dividend equities. For example, in 2022, when the Federal Reserve raised its federal funds rate seven times to tackle persistent inflation—four of which were consecutive hikes of 75 basis points—dividend stocks outperformed the broader market. This could be due to the fact that dividend-paying companies tend to be well-established and more stable, with enough confidence in their cash flows to commit to returning cash to shareholders. Moreover, committing to a dividend imposes financial discipline. Instead of using excess cash for acquisitions that may or may not create value, repurchasing shares at uncertain prices, or funding speculative growth initiatives, executives are compelled to manage payouts responsibly.

Given investors’ growing interest in dividend stocks, more companies are initiating and increasing their dividend payments. A key driver behind this trend is that many companies, particularly large tech firms, have substantial cash reserves and are rapidly boosting their free cash flows. This strong financial footing allows them to reward investors with higher dividends. According to the latest report from S&P Dow Jones Indices, companies in the index paid $153.4 billion in dividends during the second quarter of 2024, up from $151.6 billion in the previous quarter and $143.2 billion in the same period last year. The report also highlighted that there were 539 dividend increases reported, compared to 460 in the same period last year, marking a 17.2% year-over-year growth. The total amount of these increases reached $20.4 billion for the quarter, up significantly from $9.8 billion in Q2 2023. With that, we will take a look at some of the best dividend stocks under $5.

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).

The Cato Corporation (NYSE:CATO)

Number of Hedge Fund Holders: 14

Share Price as of the close of August 23: $4.9

An American retailer of women’s fashion and accessories, The Cato Corporation (NYSE:CATO) ranks fifth on our list of the best dividend stocks under $5. The company is encountering challenges, as reflected in its Q1 2024 earnings. High interest rates and inflation are putting pressure on customers’ discretionary spending, which continues to negatively impact sales. Given this financial strain on its customers, the company remains cautious about the outlook for the rest of the year. In the first quarter, which ended on May 4, 2024, the company did not open any new stores and permanently closed seven.

The Cato Corporation (NYSE:CATO) generated $175.3 million in revenues in the first quarter, which reported an 8% decline from the same period last year. The company’s same-store sales also fell by 6% on a YoY basis. One positive aspect of the company’s operations is its strong balance sheet. The cash reserves are currently covering the dividends, which the company is struggling to pay due to negative cash flows. Cato still holds a significant amount of cash, with $39.1 million in cash and equivalents and $66.3 million in short-term investments, totaling $105.4 million in unrestricted capital. This is particularly notable given the company’s market cap of $100.7 million.

The Cato Corporation (NYSE:CATO) is not entirely in bad shape overall, even if it might appear that way right now. A shift in consumer sentiment could positively impact its operations. Additionally, it’s drawing investor interest due to its long history of consistent dividend payments. The company has been paying regular dividends to shareholders since 1987 and currently offers a quarterly dividend of $0.17 per share. The stock offers an impressive dividend yield of 13.88%, as of August 23.

The number of hedge funds tracked by Insider Monkey owning stakes in The Cato Corporation (NYSE:CATO) grew to 14 in Q2 2024, from 9 in the previous quarter. The consolidated value of these stakes is over $9.5 million. Among these hedge funds, Jim Simons’ Renaissance Technologies was the company’s leading stakeholder in Q2.

Overall CATO ranks 5th on our list of the best dividend stocks under $5. While we acknowledge the potential for CATO 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 CATO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.

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