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.
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
7. McDonald’s Corporation (NYSE:MCD)
Number of Hedge Fund Holders: 79
Dividend Yield as of October 27: 3.1%
McDonald’s Corporation operates the fast food restaurant chain worldwide, with over 45,000 locations in more than 100 countries. Around 95% of the restaurants are operated by independent franchisees. The company pays a quarterly dividend and has increased its annual dividend for 50 consecutive years, thus qualifying as a Dividend King.
On 17th September, McDonald’s announced a 4% increase in its quarterly dividend to $1.93 per share, up from $1.86. That works out to $7.72 per share on an annualized basis. Based on the current share price, the stock’s dividend yield sits at 3.1%. McDonald’s dividend growth has beaten inflation over the last few years. The annual dividend has gone from $5.66 in 2022 to $7.17 in 2025, which is a 27% increase. Read the valuation and dividend analysis here.
The most recent increase is in line with that trend. The important thing for shareholders to bear in mind is that dividend growth is not the same as total return. Total return is also a function of the change in the share price. The company’s capital allocation policy is to reinvest in the business, pay dividends, and repurchase shares with residual free cash flow. Future dividends are still subject to board approval and will be determined by the level of profitability that we expect and the level of financing required. It has a very long track record of dividend increases, but as with any company, you have to look at the cash flow, the debt, and the valuation you’ve paid for the shares in order to assess the sustainability of the dividend.
6. NextEra Energy, Inc. (NYSE:NEE)
Number of Hedge Fund Holders: 80
Dividend Yield as of October 27: 3.04%
NextEra Energy, Inc. (NYSE:NEE) is an electric power and energy infrastructure company. It operates Florida Power & Light, which serves around 12 million people in Florida, and develops renewable energy projects via NextEra Energy Resources. Its power generation mix is natural gas, nuclear, and renewables, such as wind and solar.
As of October 2026, the quarterly dividend is $0.6232, giving an annualized dividend of $2.4928 per share. At the recent share price, the dividend yield was about 3.04%. The company has rewarded shareholders with growing dividends for 31 consecutive years. In Q1 2026, NextEra Energy increased its quarterly dividend 10% year over year, from $0.5665 to $0.6232 per share. This was in line with its plan to grow its annual dividend by around 10% per year from 2024 through to 2026. Management expects the rate of dividend growth to slow to 6% per annum from the end of 2026 through to 2028.
The latest increase is in keeping with the company’s track record of sustained dividend growth, and its regulated utility business provides a reliable source of electricity revenue. It’s important to separate the current yield from the potential for future income growth. NEE’s current yield of around 3% reflects income that will be distributed to shareholders. The dividend growth targets are subject to board approval and the company’s performance.
Read the full analysis here: NextEra Energy (NEE) vs. DUK and AEP: Can Its Dividend Moat and Earnings Growth Close the Valuation Gap?
5. The Procter & Gamble Company (NYSE:PG)
Number of Hedge Fund Holders: 83
Dividend Yield as of October 27: 2.74%
The Procter & Gamble Company is a consumer staples company selling products such as Tide, Pampers, Gillette, Crest, and Head & Shoulders. The company is a solid dividend payer; however, the amount of the next dividend will be at the discretion of the board based on the company’s profitability, cash flow, and financing requirements. P&G has paid a dividend for 136 consecutive years and has increased its dividend for 70 consecutive years.
In April, P&G increased its quarterly dividend by 3% to $1.0885, up from $1.0568, which works out to $4.354 per share annually. At a share price of $159, that’s a yield of about 2.7%. P&G’s dividend growth has slowed down compared to the increases we saw previously. The dividend was up 7% in 2024, 5% in 2025, and 3% in 2026. This is relevant to investors who are counting on dividend growth to provide a hedge against inflation.
P&G has maintained an outstanding record of dividend payouts, but the increases in the most recent years have been smaller than those in prior years. The breadth of the company’s range of everyday household and personal care products provides a constant stream of consumer demand. That said, investors should look at the dividend in the context of its valuation and cash flow rather than just the fact that it’s been paid out for so long. P&G is currently yielding around 2.7% and provides both current income and a very strong track record of increasing the dividend each year.
Also read: Would You Buy P&G at this Valuation?
4. AbbVie Inc. (NYSE:ABBV)
Number of Hedge Fund Holders: 88
Dividend Yield as of October 27: 2.41%
AbbVie Inc. (NYSE:ABBV) is a pharma company that develops and markets medicines in the areas of immunology, neuroscience, oncology, and others. The portfolio includes Skyrizi, Rinvoq, Botox, and Venclexta. It pays a quarterly dividend and has increased its dividend for over 50 years running, including the period when it was part of Abbott Laboratories, prior to becoming an independent company in 2013.
AbbVie’s board declared a quarterly dividend of $1.73 per share in Q3 2026, which is $6.92 per year. At the latest reported yield of circa 2.42% as of Oct 26, that’s a fairly modest income return. The company has increased its dividend by over 330% since it was formed in 2013. The dividend growth is underpinned by the new immunology products, which are helping to make up for the decline in Humira sales as a result of biosimilar competition. Q2 2026 Skyrizi revenue was $5.51 billion, up 24.4% YoY, and Rinvoq revenue was $ 2.53 billion, up 24.5% YoY. Humira revenue was down 35.9% to $756 million in the same period.
Also read: Jim Cramer and Ken Fisher Like This Healthcare Stock
AbbVie reported $16.99 billion in Q2 revenue, up 10.2% YoY, and adjusted diluted earnings of $3.65 per share, up from $2.97 per share a year ago. Management’s July guidance for full-year 2026 adjusted earnings was $13.87 to $14.07 per share. On an annualized dividend of $6.92, that works out to an adjusted earnings payout ratio of around 49%-50 %. This payout ratio allows the company to pay dividends while continuing to invest in its drug pipeline. For the dividend investor, the key question is whether Skyrizi and Rinvoq can continue to grow as Humira continues to lose ground.
3. The Coca-Cola Company (NYSE:KO)
Number of Hedge Fund Holders: 90
Dividend Yield as of October 27: 2.30%
The Coca-Cola Company (NYSE:KO) is a global beverage manufacturer and marketer operating in over 200 countries and territories. The company principally sells its beverage concentrates and syrups to independent bottlers who then manufacture, package, and distribute the finished product.
Coca-Cola has a dividend yield of about 2.3%, on an annualized basis, at a quarterly dividend of $2.12 per share. It’s been increasing its annual dividend for 64 years in a row. In February 2026, the board approved a 4% increase in the quarterly payment, from $0.51 to $0.53 per share, bringing the annualized dividend to $2.12, up from $2.04 in 2025.
Coca-Cola’s latest results also underpin its dividend profile. Q3 2026 net revenue was up 7% YoY to $13.4 billion, with global unit case volume up 5%. Operating margin was 33.4% compared to 32.0% a year earlier. For the first nine months of 2026, the company generated $12.5 billion in operating cash flow and $11.4 billion in free cash flow. These cash flows provide very good coverage of the dividend. Read the full dividend analysis here.
Coke paid out around $8.8 billion in dividends in 2025, so the free cash flow generated through September 2026 alone is already in excess of that annual dividend payment. The key question is whether it can continue to generate cash as it ramps up its marketing spend and manages input costs. The most recent results showed operating expenses and marketing spend up, partly negating the benefit of the revenue growth.
2. ExxonMobil Holdings Corporation (NYSE:XOM)
Number of Hedge Fund Holders: 96
Dividend Yield as of October 27: 2.27%
ExxonMobil Holdings Corporation (NYSE:XOM) is an integrated energy company with operations in oil and gas production, refining, chemicals, and lower-emissions energy technologies. It pays a quarterly dividend of $1.03 per share, equating to $4.12 per year. The stock has a dividend yield of around 2.3%. ExxonMobil has increased its annual dividend for 43 consecutive years, and the most recent increase of 4% was announced in 2025. The company’s dividend is underpinned by cash flow from both its upstream and downstream businesses, with the dividend being subject to the volatility of oil and gas prices. Read the full dividend analysis here.
In the second quarter of 2026, the company generated $23.6 billion in operating cash flow and $17.2 billion in free cash flow. It paid out $4.3 billion in dividends during the quarter, which is a very healthy level of cash flow coverage for the dividend. The dividend history is one of a very long string of annual increases, but the quarterly dividend has to be looked at in the context of cash flow in different commodity price regimes.
In 2025, ExxonMobil had $52 billion in operating cash flow and $26.1 billion in free cash flow and paid out $17.2 billion in dividends. That left cash flow after capital spending just sufficient to cover dividend payments, though that buffer would erode with weak oil prices or higher investment spending. At the current annualized rate, it’s a very low yield when you compare it to other energy stocks. The attraction is in the combination of the income on a quarterly basis and the very long track record of dividend growth rather than the yield per se. The track record has to be weighed up against oil price sensitivity and the massive capital requirements of the company when you’re looking at the sustainability of future increases.
1. Johnson & Johnson (NYSE:JNJ)
Number of Hedge Fund Holders: 117
Dividend Yield as of October 27: 2.01%
Johnson & Johnson is an innovator in prescription medicines and medical technologies with its business split between Innovative Medicine and MedTech. The company pays a quarterly dividend of $1.34 per share, which is $5.36 per year. It gives the stock a dividend yield of 2.0% as of October 2027.
In April 2026, J&J increased its dividend by 3.1%, taking its dividend growth streak to 64 years. The most recent quarter’s results also provide some context for the dividend payout. Q2 2026 sales for JNJ were $25.31 billion, up 6.6% YoY, and it generated an estimated $8.7 billion in free cash flow for the first half of the year. The dividend paid in the quarter was $3.23 billion, as per the SEC filing. Read Johnson & Johnson’s Dividend Machine Is Running. Can Earnings Keep Up? for full dividend analysis.
The $5.36 annualized dividend is roughly 46% of the company’s 2026 adjusted earnings per share midpoint of $11.68. That would suggest there is scope for the dividend within the management guidance on earnings. The caveat being that adjusted earnings don’t necessarily equate to cash available for distribution. Johnson & Johnson’s appeal is its long track record of dividend growth, from its med and medical device businesses. The yield is not particularly high at around 2%, so for an income investor the current dividend has to be weighed up against the prospect of future dividend increases.
While we acknowledge the risk and potential of JNJ as an investment, we believe certain AI infrastructure stocks offer far stronger long-term potential at a much more attractive entry point. If you are looking for an AI stock more promising than JNJ that operates as a critical AI tollbooth and stands as the most important company in the world, check out our report about this must-own AI stock.
READ NEXT: 10 Best Dividend Stocks with Monthly Payout and 10 Dividend Stocks with the Highest Yield
Follow Insider Monkey on Google News.
