We recently compiled a list of the 10 Best Dividend Stocks with Over 9% Yield According to Analysts. In this article, we are going to take a look at where FAT Brands Inc. (NASDAQ:FAT) stands against the other dividend stocks with over 9% yield.

The ongoing debate between dividend yields and dividend growth has left investors split on this strategy. Although high yields can be tempting, excessively high yields can be concerning from the start. Investors are often warned against yield traps, as extremely high yields can indicate potential financial issues within the company. Investors may require a higher return to offset the increased risk associated with the investment. According to analysts, the best dividend stocks aren’t necessarily those with the highest yields. They recommend that investors look beyond just the yield and focus on stocks with reliable dividends, purchasing these stocks when they are undervalued. Dan Lefkovitz, a strategist for Morningstar Indexes, made the following comment about extremely high yields in the firm’s recent report:

Does this mean investors should steer clear of high yields? While the general consensus might lean towards this, the real answer depends on the company’s fundamentals. It’s important to note that high yields aren’t necessarily a negative indicator. In fact, dividend yield becomes quite significant when investing in dividend stocks. It is a key factor as it shows how much income an investor can expect to earn from dividends compared to the stock’s price. However, factors such as the company’s cash flow generation, payout ratio, and dividend growth also need to be taken into account to fully benefit from high yields. If these metrics are strong, then stocks with high yields can also be worth considering.

Read Also Best Dividend Growth Stocks to Buy and Hold Now and 10 Best Dividend Aristocrats with Over 3% Yield.

Some reports have highlighted the long-term benefits of high-yield stocks, noting that as dividend yields increase, returns tend to rise while risk decreases. Hartford Funds recently did detailed research on this by taking annualized standard deviation into account. Standard deviation measures the volatility of a portfolio’s total returns, with a higher standard deviation indicating greater historical volatility. According to the report, from December 1969 to March 2024, high-dividend portfolios delivered an annualized return of 12.3%, mid-dividend portfolios 10.5%, and low-dividend portfolios 9.7%. The annualized standard deviations for these portfolios were 14.1%, 16%, and 20.8%, respectively.

In addition, a company’s dividend payout ratio is a crucial indicator of its ability to adjust its dividend policy. Firms that either just cover their dividends or allocate most of their earnings to dividends might face risks from competitive pressures, as their cash flow may be inadequate for operational needs. Companies with high payout ratios could experience slower future growth which may impact both share price appreciation and dividend increases.

Nuveen examined the performance of companies with high payout ratios from December 2003 to December 2023. According to the report, stocks with the highest payout ratios have not been the strongest performers over the long term historically. Among companies that have paid dividends in the past 20 years, those with medium and medium-high payout ratios have generally outperformed. We also think these attributes make a strong case for including companies with robust balance sheets and solid fundamentals for future dividend investment in a portfolio.

Our Methodology:

For this list, we screened for dividend stocks with yields higher than 9% as of August 12. Then, we narrowed down the choices by finding stocks with the highest upside potential according to analysts. Among those stocks, we chose companies that have relatively stable dividend histories, however, a lot of the companies on the list don’t have a consistent record of paying dividends due to their exceptionally high yields. They either stopped or reduced their dividend payments in 2020 due to the pandemic or because they were facing financial difficulties. The stocks are ranked in ascending order of their upside potential, as of August 12.

We’ve also mentioned the hedge fund sentiment for each stock using Insider Monkey’s Q1 2024 database. Why are we interested in the stocks that hedge funds pile into? 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 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).

A close-up of a variety of restaurant dishes in a fast-casual setting.

FAT Brands Inc. (NASDAQ:FAT)

Upside Potential as of August 12: 268.6%

Dividend Yield as of August 12: 10.32%

FAT Brands Inc. (NASDAQ:FAT) is an American multi-brand restaurant company, based in California. Over the past three years, FAT Brands (FAT) has expanded its portfolio to include 18 renowned restaurant brands, with around 2,300 units spread across 40 countries and 49 US states. The company is experiencing strong business momentum this year as it has opened 45 new restaurants so far in 2024, 24 of which were launched in the second quarter, and it plans to open over 120 new locations in 2024. The company is seeing significant activity from new franchisees, ongoing interest from existing partners to develop additional brands and increased enthusiasm for exploring co-branding opportunities that capitalize on synergies within its brand portfolio.

In the second quarter of 2024, FAT Brands Inc. (NASDAQ:FAT) generated over $152 million in revenues, which showed a 42.4% growth from the same period last year. The company is also optimistic about its business prospects for the remainder of the year. Its long-term strategy focuses on generating value through the organic growth of its existing brands, acquiring new brands that strategically enhance its portfolio and realizing value from strategic divestments to manage outstanding debt. Ultimately, the goal is to increase long-term value for stakeholders.

On July 11, FAT Brands Inc. (NASDAQ:FAT) declared a quarterly dividend of $0.14 per share, which was in line with its previous dividend. The stock has a dividend yield of 10.32%, as of August 12. Street analysts maintained a Consensus Buy rating on the stock with a $20 price target, which reflects a significant upside potential of 269%.

As per Insider Monkey’s database of Q1 2024, 4 hedge funds held stakes in FAT Brands Inc. (NASDAQ:FAT), the same as in the preceding quarter. These stakes are worth nearly $7 million in total. Among these hedge funds, ADW Capital was the company’s largest stakeholder in Q1.

Overall FAT ranks 1st on our list of the best dividend stocks with over 9% yield. While we acknowledge the potential of FAT as an investment, our conviction lies in the belief that some deeply undervalued dividend stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued dividend stock that is more promising than FAT but that trades at less than 7 times its earnings and yields nearly 10%, check out our report about the dirt cheap dividend stock.

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Disclosure: None. This article is originally published at Insider Monkey.