The Federal Reserve's Chief Jerome Powell on April 16 said it might take longer than expected to begin cutting interest rates as data continues to show inflation is still high. Many analysts were already incorporating the possibility for a higher for longer scenario, in which the Fed could hold rates steady throughout 2024. In this environment, the appeal of companies with strong fundamentals, certain income and growth potential has redoubled. In January, Lord Abbett said in a report that interest rate hikes in the US has caused a paradigm shift which has made high-quality companies with strong profits and dividend growth history attractive for investors. The report said that high-profit companies have the "agility" to adjust according to the changing environment, benefit from existing opportunities and also conduct mergers and acquisitions for expansion.
Peter Lynch's Thoughts on Dividend Investing
Legendary investor Peter Lynch in his famous book One Up on Wall Street also emphasizes the importance of focusing on dividend growth. What makes a company with years of dividend growth under its belt better than another company with a heavier payout but no dividend growth?
"If you do plan to buy a stock for its dividend, find out if the company is going to be able to pay it during recessions and bad times. How about Fleet-Norstar, formerly Industrial National Bank, which has paid uninterrupted dividends since 1791? If a slow grower omits a dividend, you’re stuck with a difficult situation: a sluggish enterprise that has little going for it. A company with a 20-or 30-year record of regularly raising the dividend is your best bet."
Dividends are "Critical" in a High-Rate World
Michael Clarfeld, ClearBridge Investments portfolio manager, recently said while talking to CNBC that "dividends are critical" in a world where interest rates are high because the only way to keep up with rising inflation is to keep your cash flows "in excess" of inflation. Clarfeld, who is bullish on consumer staples in addition to other overlooked sectors this year, said that there are high-quality dividend companies that are growing payouts at 8%-9% a year, easily surpassing inflation.
Investors Should Get Ready for a High Rate Environment
Clarfeld said he's surprised to see investors shocked at the Fed's indication that it won't be able to cut rates anytime soon because of high inflation. Clarfeld said people got "habituated" to low interest rates in the years following the 2008 financial crisis. The analyst said if we broaden our horizon, we will see that the current interest rates at no that high. The problem, according to Clarfeld, is that people are comparing today's interest rates with the rates seen over the past decade. Clarfeld also said that instead of focusing too much on when the Fed will initiate its first rate cut, investors would need to embrace the possibility that we might see a higher interest rate environment for years to come.
Best Dividend Stocks with Over 9% Yield According to Analysts
While dividend growth is critical, for this article we decided to take a look at stocks with high dividend yields liked by Wall Street analysts. We first used a stock screener to identify stocks that have dividend yields over 9%, Buy or better ratings and strong price targets. From these companies we chose 10 stocks with the highest upside potential based on average analyst price estimates.
Liquefied natural gas carriers (LNGCs) company Cool Company Ltd (NYSE:CLCO) ranks 10th in our list of the dividend with over 9% dividend yield to buy according to Wall Street analysts. As of the end of the fourth quarter of 2023, eight hedge funds tracked by Insider Monkey had stakes in Cool Company Ltd (NYSE:CLCO).
With a 10% dividend yield, British American Tobacco PLC (NYSE:BTI) is a notable dividend-paying stock also popular among smart money investors. Insider Monkey’s database of elite hedge funds shows that 22 hedge funds reported having stakes in British American Tobacco PLC (NYSE:BTI) as of the end of 2023.
Last month, JPMorgan published a list of European stocks with sustainable yields. British American Tobacco PLC (NYSE:BTI) was one of these stocks. JPMorgan said these companies have “safe and higher-than-sector-median dividends” and free cash flow yields higher than their sector median.
British American Tobacco talked about important business insights during its earnings call in February:
"We have sequentially improved our new category contribution from a peak loss of £1.1 billion in 2020, to a small profit position in 2023, reflecting a £400 million improvement last year. It’s important to note that while we expect new category profitability to continue to improve each year, due to the phasing of investments, the improvement in contribution year-on-year will not be linear. We made strong progress in our top 10 new category markets, which generated about three quarters of our new category revenue in 2023, with category contribution margin now above 20%. The performance of these markets demonstrates that revenue continues to grow at pace. Gross and contribution margins are expanding strongly with scale; and absolute margin levels are moving closer to the level of our Combustibles business.
Broyhill Asset Management stated the following regarding British American Tobacco p.l.c. (NYSE:BTI) in its fourth quarter 2023 investor letter:
“The largest detractors to performance over the quarter were LatAm airports (ASR, OMAB, PAC), Bayer, and British American Tobacco p.l.c. (NYSE:BTI). After years investing across the tobacco sector, it became increasingly clear that owning anything other than the global leader – Philip Morris – made little sense. Consequently, we liquidated our investment in British American Tobacco after deciding that the (seemingly) cheap valuation wasn’t worth the mental anguish. In a hollow victory, shortly after our sale, management promptly wrote down the value of its US tobacco brands by $31.5 billion, sending shares cratering.”
Billionaire Carl Icahn-led conglomerate Icahn Enterprises LP Common Stock (NASDAQ:IEP) is one of the dividend stocks with 9% yield that has high upside potential based on analyst price estimates. Wall Street analysts expect the stock to reach $25, while it was trading at around $17 as of April 14. The company talked about dividends and other important business matters in an earnings call in February:
"CVI declared a fourth quarter cash dividend of $0.50 per share. And now to our Automotive segment. As we previously discussed, the segment has undergone significant change due to the deconsolidation of Auto Plus in January of 2023. The segment results throughout 2023 are made up primarily of automotive service operations as compared to 2022, which also included the aftermarket parts operations of Auto Plus.
Telecom giant Vodafone Group Plc (NASDAQ:VOD) is one of the dividend stocks that have high upside potential based on Wall Street analyst price targets. It’s a high-yield dividend stock with 24 hedge fund investors as of the end of 2023. The most notable stake, worth $37 million, in Vodafone Group Plc (NASDAQ:VOD) is owned by Steven Tananbaum’s GoldenTree Asset Management.
6. Cherry Hill Mortgage Investment Corp (NYSE:CHMI)
Average Analyst Price Estimate: $5
Upside Potential: 50%
With an over 15% dividend yield and high stock price upside potential, Cherry Hill Mortgage Investment Corp (NYSE:CHMI) is a dividend stock to watch. However, the stock has lost ground this year amid a decline in rate cut probability.
Out of the 933 funds tracked by Insider Monkey, seven hedge funds in Insider Monkey’s database had stakes in Cherry Hill Mortgage Investment Corp (NYSE:CHMI).
