We recently compiled a list of the 10 Best High-Yield Dividend Stocks To Invest In. In this article, we are going to take a look at where Diamondback Energy, Inc. (NASDAQ:FANG) stands against the other high-yield dividend stocks.
Dividend stocks have been investors’ favorites for a long time now. Over the years, these equities have performed better than the broader market. That said, when it comes to dividend investing, opinions often split down the middle between those seeking high yields and those favoring dividend growth. Though analysts recommend buying stocks with proven tracks of dividend growth, the appeal of high yields is hard to ignore. According to analysts, investors should steer clear of yield traps and focus on companies that consistently increase the value returned to shareholders. However, those advocating yields have plenty to say about the significance of dividend yields.
Also read: 12 Best Fortune 500 Dividend Stocks To Buy Right Now
One such example is a report published by Newton Investment Management. According to the report, high-yield dividend stocks outperformed the broader market during high inflationary periods between 1940 and 2021. The report also revealed that investment portfolios with high-yield dividend stocks outperformed those with low or no dividends in terms of value-weighted performance. High-yield portfolios surpassed low-yield ones by 199 basis points and zero-yield portfolios by 330 basis points. While this result provides useful information, it doesn’t offer details about the market conditions at the time, giving only a broad picture of high-yield stock performance. Analysts have paid close attention to how dividend stocks perform during market volatility, as the need for consistent income becomes more pronounced in such times. As a result, they suggest considering high-yield stocks only if these companies also have a strong history of dividend growth.
Dan Lefkovitz, a strategist for Morningstar Indexes, made the following comment about extremely high yields in the firm’s recent report:
“It’s really critical to be selective when it comes to buying dividend-paying stocks and chasing yield. Looking for the most yield-rich areas of the market can often lead you into troubled areas and dividend traps—companies that have a nice-looking yield that is ultimately unsustainable. You have to screen for dividend durability and reliability going forward.”
That said, high yields aren’t automatically a bad sign. In fact, dividend yield plays an important role when investing in dividend stocks, as it shows how much income an investor can expect relative to the stock’s price. However, to fully benefit from high yields, other factors like the company’s cash flow, payout ratio, and dividend growth must also be considered. If these metrics are strong, high-yield stocks can still be appealing. Some reports have pointed out the long-term advantages of high-yield stocks, noting that as dividend yields increase, returns generally rise, and risk decreases. Hartford Funds conducted research factoring in annualized standard deviation, which measures a portfolio’s return volatility, with a higher standard deviation indicating greater historical risk. The report found that from December 1969 to March 2024, high-dividend portfolios delivered an annualized return of 12.3%, mid-dividend portfolios 10.5%, and low-dividend portfolios 9.7%. The annualized standard deviations for these portfolios were 14.1%, 16%, and 20.8%, respectively.
The ideal situation would be when dividend growth and high yields go hand in hand, as many companies have demonstrated that this is achievable. With that being said, we will now take a look at some of the best dividend stocks with high yields to invest in.
Our Methodology:
For this list, we scanned Insider Monkey’s database of 900 hedge funds as of Q3 2024 and picked dividend stocks that have yields above 4%, as of January 20. 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).
A pipeline worker overseeing the flow of crude oil into storage tanks from an integrated water system.
Diamondback Energy, Inc. (NASDAQ:FANG)
Number of Hedge Fund Holders: 49
Dividend Yield as of January 20: 4.60%
Diamondback Energy, Inc. (NASDAQ:FANG) is an American company that is engaged in the exploration of hydrocarbons. The company stands as the top pure-play producer in the Permian Basin, having secured a substantial position of 870,000 net acres through several acquisitions. The most significant of these was its $26 billion merger with Endeavor Energy Resources, finalized in September. The newly combined entity is expected to produce over 816,000 barrels of oil equivalent (BOE) per day. Diamondback now boasts more than 6,100 drilling locations, with a break-even cost of under $40 per barrel. The stock has surged by over 18.5% in the past 12 months.
Diamondback Energy, Inc. (NASDAQ:FANG) has a strong cash position. The company’s operating cash flow for the most recent quarter came in at $1.2 billion and its free cash flow was $780 million. During the quarter, it also returned $708 million to shareholders through dividends, which represents approximately 78% of its Adjusted Free Cash Flow.
Diamondback Energy, Inc. (NASDAQ:FANG) aims to return half of its free cash flow to investors. The company plans to keep increasing its dividend, which has seen an average quarterly growth of 8% since its introduction in 2018, leading the industry. In addition, it intends to buy back shares and, if there is extra cash available, it will distribute a variable dividend to shareholders. In the third quarter of 2024, the company reported revenue of $2.65 billion, which saw a 13% growth from the same period last year.
Diamondback Energy, Inc. (NASDAQ:FANG), one of the best dividend stocks, started paying dividends in 2018 and has paid regular dividends to shareholders since then. Its quarterly dividend comes in at $0.90 per share for a dividend yield of 4.60%, as of January 20.
The number of hedge funds tracked by Insider Monkey owning stakes in Diamondback Energy, Inc. (NASDAQ:FANG) grew to 49 in Q3 2024, from 44 in the previous quarter. These stakes have a collective value of over $1.67 billion.
Overall FANG ranks 9th on our list of the best high-yield dividend stocks to invest in. While we acknowledge the potential for FANG 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 time frame. If you are looking for an AI stock that is more promising than FANG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 20 Best AI Stock To Buy Now and Complete List of 59 AI Companies Under $2 Billion in Market Cap
Disclosure: None. This article is originally published at Insider Monkey.