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10 Most Undervalued Dividend Growth Stocks According to Hedge Funds

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Dividend-paying stocks can be an important part of a long-term investment portfolio because they let investors earn steady income while also participating in the stock market’s growth. Companies with established dividend policies are generally mature businesses with strong, sustainable earnings and cash flows, which is why they appeal to investors seeking both income and the potential for capital appreciation. Moreover, dividends can become a significant factor in long-term returns when investors reinvest them rather than take them as cash.

A recent report by Charles Schwab shows the long-term advantages of reinvesting dividends. The report compared the hypothetical performance of a $10,000 investment in the Dow Jones U.S. Dividend 100 Index over the 10-year period ending July 31, 2026, in two situations: one in which dividends were reinvested and the other in which they were received as cash. The findings indicated that reinvesting the dividends would have resulted in a final portfolio value about 42% higher than if the dividends had been taken as cash. This gap demonstrates the effect of compounding, since the dividends that were reinvested bought extra shares which then produce income over time.

Also read: 10 Best Dividend Stocks with Monthly Payout

Dividend-paying companies can also support portfolio diversification by giving investors access to a range of sectors and other potential sources of returns, as well as growth-oriented investments. However, when assessing these shares, investors should go beyond looking at the dividend yield. Schwab warns that very high yields may indicate a falling share price and worsening business fundamentals, which could lead to a dividend cut. It is still important to consider a company’s ability to maintain its dividend payments, this being based on steady earnings and the generation of cash flow. Read our coverage of dividend stocks with the highest yields.

Valuation also matters, especially when you want to combine dividend income with long-term capital gains. Purchasing well-financed companies at good prices can give a better basis for future returns and leave room for possible increases in the share price. With this backdrop, we provide the expanded list of 10 Most Undervalued Dividend Growth Stocks According to Hedge Funds.

Photo by Jp Valery on Unsplash

Our Methodology:

For this list, we screened for dividend companies that have increased their dividends consistently for more than 30 years. From there, we selected companies with dividend yields of at least 2% as of October 27. From that list, we selected 10 stocks with the most hedge fund investors, using Insider Monkey’s Q2 2026 database of hedge funds and their holdings. Hedge funds buy these dividend stocks not for their dividend yields; they buy these stocks because they think these dividend stocks are undervalued.

Why do we care about what hedge funds do? 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 612.3% since May 2014, beating its benchmark by 375 percentage points (see more details here).

10. PepsiCo, Inc. (NASDAQ:PEP)

Number of Hedge Fund Holders: 68

Dividend Yield as of October 27: 4.41%

PepsiCo, Inc. (NASDAQ:PEP) pays dividends quarterly and has maintained quarterly distributions since 1965. In February 2026, the company announced a 4% increase in the annualized dividend to $5.92 per share from $5.69, which is its 54th consecutive annual dividend increase. At a share price of around $133, that gives an annualized payout of $5.92 and a dividend yield of 4.4%. Read the full dividend analysis here.

The company plans to distribute $7.9 billion in dividends in 2026 and $1 billion in share buybacks. That’s the company’s stated commitment to returning cash to shareholders. For the dividend investor, the key question is whether it can continue to fund the higher level of payouts whilst still meeting its operating and investment requirements.

PepsiCo has a very long track record of annual dividend increases and is therefore an established income stock. The latest increase was smaller than the 5% increase announced in 2025, which suggests a more measured approach to dividend growth going forward. As ever, the question for investors will be how much the dividend can be increased in the future in relation to the cash flow being generated and the amount of shareholder distributions that the company plans to make.

9. Lowe’s Companies, Inc. (NYSE:LOW)

Number of Hedge Fund Holders: 69

Dividend Yield as of October 27: 2.53%

Lowe’s Companies, Inc. is a home improvement retailer that sells building materials, appliances, tools, hardware, and products for home maintenance and renovation. It operates over 1,750 stores and had sales of over $86 billion in fiscal 2025.

Lowe’s pays a dividend quarterly and has paid a cash dividend every quarter since going public in 1961. It has increased its annual dividend for 64 years in a row and is therefore a Dividend King. In May 2026, it increased its quarterly dividend by 4%, from $1.20 to $1.25 per share, which takes its annualized dividend to $5.00 per share. At a dividend yield of around 2.5%, Lowe’s is a very attractive proposition in terms of regular income and a very long track record of dividend growth. The most recent increase was, however, a bit smaller than the company’s 5-year average of 15.61% per annum, indicating a somewhat more conservative approach to dividend growth in the recent past. Read the dividend analysis here.

Lowe’s paid $2.64 billion in dividends in FY2025, up from $2.57 billion in FY2024, with total dividends per share rising from $4.50 to $4.70. The most recent quarterly rate of $1.25 brings the annualized dividend to $5.00. For investors looking at dividend growth, Lowe’s track record of consecutive increases and the most recent increase in its dividend are big advantages. The 2.5% yield on the stock is, of course, fairly modest in comparison to a number of the higher-yielding dividend stocks.

8. International Business Machines Corporation (NYSE:IBM)

Number of Hedge Fund Holders: 74

Dividend Yield as of October 27: 2.70%

International Business Machines Corporation (NYSE:IBM) offers hybrid cloud, AI, software, consulting, and IT infrastructure to businesses and government. The company pays a quarterly dividend and has paid a cash dividend every year since 1916. The most recent declared quarterly dividend is $1.69 per share, which is $6.76 per year. At a current dividend yield of around 2.7%, it provides a consistent income stream alongside its long track record of dividend payments.

IBM raised its quarterly dividend from $1.68 to $1.69 in April 2026, which is its 31st consecutive annual dividend increase. It has maintained the dividend through a number of business cycles, but that long a track record doesn’t guarantee it will continue. The dividend is also supported by IBM’s cash generation. In the third quarter of 2026, IBM generated $3 billion in free cash flow and returned $1.6 billion to shareholders via dividends. That shows the company was still generating cash and funding its dividend payments in the quarter, though the quarterly numbers don’t necessarily tell you anything about full-year dividend coverage.

For dividend investors, the case for IBM is very much based on its track record of paying a dividend and its exposure to enterprise software, hybrid cloud, and AI-related services. The 2.7% yield is fairly modest, but the dividend increase is a clear sign that management is still raising it, just at a gradual pace.

Also take a look at: IBM’s Valuation is Getting Interesting as AI and Consulting Rebound

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