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15 Best Dividend Stocks with Upside Potential

Ma’k Almario
·18 min read

In this article, we present to you the 15 best dividend stocks with upside potential. If you're in a hurry, click to skip ahead and jump to the 5 Best Dividend Stocks with Upside Potential.

Dividend stocks are companies that pay out regular dividends. Dividend stocks are usually well-established companies with a track record of distributing earnings back to their shareholders.

In order to support the US economic recovery out of the coronavirus contraction, the Federal Reserve pledged to keep interest rates low for an extended period of time. We believe the 10-year Treasury bonds yield less than the potential average inflation rate for the next 10 years. A retired American can no longer generate decent income by investing in low-risk bonds. No doubt the COVID-19 pandemic has certainly changed how we live our lives today. So when transformation becomes imperative, the best thing we can do is adapt to the change. Including the decisions, we make for our portfolios.

For many low-risk investors, investing in savings accounts or long-term bonds would have been the best option a couple of years ago. However, today when short-term interest rates are near zero, it is the best time we start looking into dividend stocks with long histories of dividend payments as an alternative. Not only short-term interest rates are near zero, long-term interest rates are also extremely low. The 30-year mortgage rates were 2.6% for low risk borrowers just a couple of weeks ago. It may sound counterintuitive but this is the perfect time to borrow money and/or invest in relatively higher risk assets like stocks. The government is on its way to send $8000 to most American families with 2 children. How? By printing money. The Federal Reserve is pushing investors towards speculative investments by limiting the downside during market crashes. Bitcoin's price skyrocketed to $40,000 for a reason.

We don't think it is prudent for retirees to speculate on cryptocurrencies or software stocks that trade for 50 times their revenues. However, there are a lot of dividend paying stocks that offer huge upside potential through capital gains. Hedge funds sometimes invest in dividend stocks not because they need these dividend payments, but they believe that these dividend stocks are undervalued and are more likely to outperform the market. Income investors have the time and patience to wait for these stocks to deliver large capital gains, and they get to collect dividend payments while waiting for these large gains to arrive anyway.

15 Best Dividend Stocks with Upside Potential
15 Best Dividend Stocks with Upside Potential

Copyright: jirsak / 123RF Stock Photo

If you haven’t started investing in hedge funds' dividend stocks yet, this is the best time for you to consider it. Investing in dividend stocks allows you to collect payments on regular intervals; there are dividend stocks that pay you monthly, quarterly, or annually. Of course, you have to study the companies you’ll buy dividends into and their terms. Say you’re an avid consumer of Apple (AAPL) products and you believe that their products would still be a lot more profitable in the future, and you know that Tim Cook makes the best long-term decisions for the company, given that the tech giant is well-established, then you hit a sweet spot! At one point in 2020 Apple's dividend yield was 1.5%. If you had bought Apple back then, you would have earned 1.5% in dividends annually, but also enjoyed capital gains of more than 100%. There are hundreds of companies that offer dividends, so make sure to stick around to see the best dividend stocks with upside potential to include in your portfolio.

Billionaire Warren Buffett’s technique is to buy low and hold. In an article we presented the 10 Dividend Stocks Warren Buffett Likes the Most. Buying discounted dividend stocks and holding it for a long period of time makes it one of the safest places to invest your money. If you hold the dividend stock for quite some time, it will generate value on top of the cash dividends themselves. If you will look closer into the dividend stock picks of Mr. Buffett, it’s composed of some biggest pharma and banking companies that have a long-standing good reputation in outperforming the market.

In order to identify the 15 best dividend stocks with upside potential, we started with holdings in the iShares Core Dividend Growth ETF (DGRO), and we were able to narrow down our list to 15 stocks by using our hedge fund sentiment scores.

Our in-house analysis shows that we can use the sentiment information gathered from the hedge fund filings to classify in advance a select group of stocks that can beat the S&P 500 index by double digits annually on average. For instance, the portfolio of our monthly newsletter’s stock picks has beaten the market by over 88 percentage points since March 2017 (see the details here). Some of the portfolio holdings of our monthly newsletter have been shared publicly too. In October, we shared this real estate stock and since then, it’s been up nearly 50 percent.

Based on our hedge fund sentiment data, we present to you the 15 best dividend stocks with upside potential based on the stock picks of 800+ hedge funds tracked by Insider Monkey:

15. Pfizer, Inc. (NYSE: PFE)

No of HFs: 66

Total Value of HF Holdings: $2.12 Billion

We start the list of best dividend stocks with upside potential with PFE. The stock was also in our lists of the 10 Best Healthcare Dividend Stocks and 10 Best Dividend Paying Stocks to Buy Under $50. Pfizer in partnership with BioNtech (BNTX) recently announced the final efficacy analysis in their ongoing Phase 3 study for BMT162b2, their mRNA-based COVID-19 vaccine. The analysis showed a 95% efficacy rate in participants without prior infection and participants with infection. And a 94% efficacy rate for adults over 65 years of age. Dr. Alber Bourla, Chairman and CEO of PFE mentioned,

“The study results mark an important step in this historic eight-month journey to bring forward a vaccine capable of helping to end this devastating pandemic. We continue to move at the speed of science to compile all the data collected thus far and share with regulators around the world. With hundreds of thousands of people around the globe infected every day, we urgently need to get a safe and effective vaccine to the world.”

Pfizer shares peaked at $43 due to optimism in December, but gave back most of those gains in recent weeks. PFE shares currently change hands at $37 and offer an annual dividend yield of 4.2%.

The top hedge fund holder of this stock is John Overdeck and David Siegel’s Two Sigma Advisors, which had over $368 million, invested in the stock at the end of September. An insider recently purchased 1,000 shares at around $38. The stock is down 2% since then.

14. Intel Corporation (NASDAQ:INTC)

No of HFs: 66

Total Value of HF Holdings: $4.34 Billion

INTC ranks 1th in our list of the best dividend stocks with upside potential. Intel Corp. (NASDAQ:INTC) shares finished 2020 on a high note following multiple reports that activist hedge fund Third Point LLC is compelling the chipmaker giant to look for strategic alternatives. Third Point CEO Daniel Loeb wrote in a letter to INTC that the company should immediately do something to further strengthen its position in the PC and data centers chip market. Third Point reportedly holds a stake of nearly $1 billion in Intel. You can read the entire letter here. Here is an excerpt:

“The loss of manufacturing leadership and other missteps have allowed several semiconductor competitors to leverage TSMC’s and Samsung’s process technology prowess and gain significant market share at Intel’s expense. Meanwhile, AMD has eaten away at Intel’s share of its core PC and data center CPU markets,”

INTC shares offer a 2.56% dividend yield at the moment. If Dan Loeb succeeds in his activist campaign, INTC shares can deliver a lot of upside for income investors as well. The top hedge fund holder of this stock is Ken Fisher’s Fisher Asset Management, which had over $1.46 billion, invested in the stock at the end of September. An Intel insider recently purchased 8,021 shares at around $44. The stock is up 13% since then.

13. Walmart, Inc. (NYSE:WMT)

No of HFs: 69

Total Value of HF Holdings: $5.49 Billion

Walmart ranks 13th in our list of the best dividend stocks with upside potential. WMT has a 1.47% dividend yield and trades at a trailing PE ratio of 21. Recently, DOJ announced that it had filed a lawsuit against Walmart for its role in the opioid epidemic. On a brighter note, WMT is preparing to administer Covid vaccines at stores across the US. Dr. Tom Van Gilder, Chief Medical and Analytics Officer for Walmart mentioned,

“With 90% of the American population living within 10 miles of a Walmart, we will play an important part in making sure those who want a vaccine can get one when they are eligible based on their state’s prioritization, especially those in hard to reach parts of the country that have recently been hit hard by the epidemic,”

The top hedge fund holder of this stock is Michael Larson’s Bill & Melinda Gates Foundation Trust, which had over $1.62 billion, invested in the stock at the end of September.

12. Home Depot, Inc. (NYSE:HD)

No of HFs: 73

Total Value of HF Holdings: $4.95

HD was mentioned as one of the 6 Low PE Ratio Stocks to Check Out and the stock is up 10% since then. HD offers a 2.25% dividend yield right now. Recently, the company announced that they have completed the $8 billion purchase of HD Supply. Craig Menear, chairman, and CEO of Home Depot mentioned that the merger of both companies will enable them to serve better.

"We're thrilled to welcome HD Supply associates to The Home Depot. The combination of the two businesses will enable us to better serve both existing and new MRO customers, and I look forward to the value this acquisition will bring to our associates, customers and shareholders."

A Hme Depot insider recently purchased 4,745 shares at around $210. The stock is up 26% since then. In an article, Ensemble Capital mentioned that they are excited for the opportunity ahead for Home Depot.

Home Depot, Inc. (3.7% weight in portfolio): Home Depot is a newer addition to the Fund. However, we’ve followed the home improvement space for many years and we’re particularly excited about the opportunity ahead for Home Depot. In the years since the housing bust, the company has managed to increase revenue by 60% and earnings by 240% even while only increasing their store count by just 2%. This sort of disciplined execution has led to the company exhibiting returns on invested capital far above most other established retailers, although Starbucks, another holding of ours also generates very high returns on capital.

11. Procter & Gamble (NYSE:PG)

No of HFs: 75

Total Value of HF Holdings: $10 Billion

PG ranks 11th in our list of the best dividend stocks with upside potential. The stock was also mentioned as one of the Top 5 Stocks Billionaire Ray Dalio Just Bought. PG offers a 2.28% dividend yield. Recently, the company announced that they would not push through with their acquisition of startup Billie as previously planned. The decision was based on FTC blocking the deal from proceeding. FTC said the merger would eliminate competition in the wet shave razor market. Both companies issued a joint statement expressing their regret

We were disappointed by the FTC’s decision and maintain there was exciting potential in combining Billie with P&G to better serve more consumers around the world. However, after due consideration, we have mutually agreed that it is in both companies’ best interests not to engage in a prolonged legal challenge, but instead to terminate our agreement and refocus our resources on other business priorities.

Distillate Capital mentioned in an article that the stock has improved over the course of the year.

“P&G is an example of a stock where the free cash yield has actually improved over the course of the year on both next-twelve-month estimates and our normalized methodology.”

10. Merck & Co. Inc (NYSE:MRK)

No of HFs: 80

Total Value of HF Holdings: $6.36

Merck & Co. is one of the 10 biggest pharmaceutical companies in the world. MRK offers a 3.13% dividend yield at the moment. HitGen recently announced a license agreement with MRK to produce a drug that will be of high interest. Dr. Jin Li, Chairman of the Board and CEO of HitGen mentioned,

“We are delighted to announce another license from our collaboration with Merck & Co., Inc Kenilworth, NJ USA. The success of delivery of these licensed compounds has further demonstrated the power of our DEL platform to discover novel small molecules against a variety of targets, including those previously deemed challenging for small molecule modalities. In this case the target may be characterized as a protease class that has proved challenging for small molecule discovery. One of the many advantages of DEL is the ability to span chemical space based on elaboration of novel scaffolds, designed without any bias for structures perceived to be ligands based on earlier studies, allowing facile discovery of assets with unprecedented structures and novel biochemical profiles. The current achievement marks the continued progress and success of the discovery collaboration between the companies, spanning a range of discovery programs. We look forward to announcing future milestones as the programs progress.”

In an article, Saturna Capital Corporation said that MRK’s minimized negative fallout.

“Bristol-Myers and Merck benefited from low valuations, strong balance sheets, and attractive dividends going into the crisis, minimizing the negative fallout.”

9. Johnson & Johnson (NYSE:JNJ)

No of HFs: 82

Total Value of HF Holdings: $4.88 Billion

JNJ ranks 9th in our list of the best dividend stocks with upside potential. JNJ offers a 2.52% dividend yield and is one of the 10 most profitable companies in America in 2020. During the third quarter of 2020, the company reported adjusted earnings of $2.20 per share, higher than $1.98 per share projected by analysts surveyed by Refinitiv.

Amana Mutual Fund Trust mentioned that the stock shares many same characteristics with Lilly (LLY)

“Even so, Lilly stood out as one, among a handful, of companies that registered a positive return for the first quarter. In January, Lilly reported excellent fourth quarter results, with revenue growing at a faster clip than over the first three quarters of the year. Lilly is also financially strong with debt equivalent to only two times EBITDA3 and 12% of market capitalization. Johnson & Johnson, while trailing Lilly, shares many of the same characteristics and also outperformed.”

The top hedge fund holder of this stock is Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, which had over $1.51 billion, invested in the stock at the end of September. An insider recently purchased 500 shares at around $127. The stock is up 24% since then.

8. Comcast Corporation (NASDAQ:CMCSA)

No of HFs: 82

Total Value of HF Holdings: $8.14 Billion

Comcast Corporation ranks 8th in our list of the best dividend stocks with upside potential and is one of the 15 Biggest Media Companies in the World. CMCSA offers a 1.82% dividend yield and trades at a forward P/E of 17. During the third quarter of 2020, the company reported revenues of $25.5 billion.

The top hedge fund holder of this stock is Boykin Curry’s Eagle Capital Management which had $2.03 billion invested in the stock at the end of September.

Here is what Longleaf Partners Fund said about the stock recently:

“Comcast (18%, 0.83%), the cable and entertainment company, added to the strong absolute results in the quarter. Cable delivered one of its best quarters of net subscriber additions ever and grew EBITDA 5.5%, while losses from closed small business customers have moderated during reopening from the COVID lockdown. Sky, the European TV and broadband business acquired in 2018, retained subscribers at a high rate despite the extended absence of live sports. CEO Brian Roberts stated that Sky remains on pace to double its EBITDA over the next several years. Comcast’s new Peacock streaming service and Universal theme parks are ramping up revenues gradually, presenting more opportunities for Comcast to improve earnings significantly over the next several years. Despite the double-digit returns in the quarter, the company remains discounted. We were encouraged by Roberts’s statement in the quarter that he was committed to repurchasing shares again in the near future.”

First Eagle Investment Management also had a few comments on the stock which we shared in this article:

“Media and telecommunications company Comcast hit an all-time high in early 2020, only to sell off with the onset of the Covid-19 pandemic and its anticipated impact on the company’s NBCUniversal entertainment unit. Comcast’s stock price has since recovered, driven in part by ongoing strength in the company’s broadband business. Late in the quarter, activist hedge fund Trian Fund Management announced that it had acquired a stake in Comcast, believing it to be undervalued; however, any actions Trian seeks to employ to unlock value may be complicated by the fact the more than one-third of Comcast’s voting rights are held by the company’s founding family.”

7. Bank of America Corporation (NYSE:BAC)

No of HFs: 88

Total Value of HF Holdings: $26.6 Billion

The seventh-best dividend stock with upside potential is BAC. Bank of America offers a 2.2% dividend yield and is among the 5 Best Value Stocks to Buy According to Warren Buffet. During the third quarter of 2020, the company reported a net income of $4.9 billion.

The top hedge fund holder of this stock is Warren Buffett’s Berkshire Hathaway which had $24.3 billion invested in the stock at the end of September. An insider recently purchased 3,754,220 shares at around $24. The stock has been up 25% since then.

6. UnitedHealth Group, Inc. (NYSE:UNH)

No of HFs: 89

Total Value of HF Holdings: $8.96 Billion

UNH ranks 6th in our list of the 15 best dividend stocks to buy now. UnitedHealth Group offers a 1.38% dividend yield and returned more than 20% since early September. The company recently announced that it will purchase Change Healthcare for $13 billion.

The top hedge fund holder of this stock is Stephen Mandel’s Lone Pine Capital which had $1.23 billion invested in the stock at the end of September. An insider purchased 2,000 shares at around $227 in August 2019 and the stock has been up 60% since then.

Polen Capital Management mentioned in an article that UNH is the future of healthcare delivery in the U.S.

“UnitedHealth Group is both the leading health insurance company in the U.S. and the largest primary care provider. It has been building an integrated healthcare model that provides medical care and health insurance to individuals and corporations and to Medicare and Medicaid beneficiaries. Insurance accounts for roughly half of the company’s profits, and medical care delivery and technology accounts for the other half.

We believe this integrated, data-driven model is the future of healthcare delivery in the U.S. and should lead to lower medical costs over time without sacrificing quality of care. UnitedHealth is moving to a practice of rewarding providers that demonstrate strong wellness and health outcomes and away from a “pay for consumption of medical care” model that treats people only when they are already sick and where costs are very high. By focusing on preventative care and wellness, medical utilization could decline, and costs should follow.

We expect UnitedHealth Group to be able to grow earnings per share at a low-to-mid-teens rate over time with low cyclicality. In addition, we see little chance of a government-run health system in the U.S. due to the massive cost, especially at a time when federal budget deficits are tremendously high, plus several other factors. As such, we believe scaled players with strong integrated models that are already being utilized to run large parts of government programs will likely continue to play a large role for many years to come.”

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Disclosure: None. 15 Best Dividend Stocks With Upside Potential is originally published at Insider Monkey.