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 .You can see the top 5 stocks below.
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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 ).
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 (NYSE:PG) 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 (NYSE:JNJ) 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 ADC 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 .
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