Hedge funds target AI-fueled growth and solid dividend yields

We recently published a list Top 10 Innovative Stocks That Pay DividendsIn this article, we’ll take a look at where International Business Machines Corporation (NYSE:IBM) stacks up against other top innovative dividend stocks.

Innovation plays a key role in today’s market. Given the significant attention that technology stocks have received over the past year, it’s clear where investors are directing their funds. Technology companies are using breakthrough technologies like artificial intelligence to process massive, complex data sets. In the healthcare sector, advances in research and development (R&D) have led to life-saving drug therapies and treatments. Meanwhile, the growing impact of climate change is forcing energy and utilities to prioritize renewable energy sources. That’s why innovation is at the heart of every industry today.

Companies in the U.S. and around the world have quickly recognized the impact of innovation on their growth and operations, and are gradually shaping their operations around it. A recent McKinsey study of more than 1,000 executives found that companies with strong innovation cultures are twice as successful as some of their competitors in scaling digital transformations. These innovative companies are focused on technologies and changes in their operating models that promote rapid learning and adaptation—essential elements of innovation. The report also highlighted that 14 of the 20 largest global companies have used innovation to either expand existing markets or create entirely new ones.

Read also: 18 most important innovations and trends in the automotive industry

A key element of innovation is R&D, which focuses on systematic and scientific research to create new products, technologies, or processes. By investing in R&D, companies can strengthen their capabilities, explore new ideas, and discover innovative solutions to meet customer requirements. Companies around the world, especially in the pharmaceutical sector, have increased their R&D investments to develop new products that meet their customers’ requirements. The Financial Times reported that R&D in the US has increased in recent decades, increasing from 2.2% of GDP in the 1980s to 3.4% in 2021. This increase is mainly due to the contribution of the private sector, which has doubled to 2.5% of GDP. In addition, the percentage of the population involved in patenting has almost doubled during this time.

It’s not just established companies that are embracing innovation in their operations; the rise of American startups is also reflecting this trend, as they’re coming up with groundbreaking business ideas that have never been heard before. Economist John Haltiwanger has found that Americans are starting new businesses at an unprecedented rate. And he’s not wrong. More new businesses were created in 2020 than in any previous year, and 2021 is right behind them. According to the Kauffman Entrepreneurship Indices, the annual survival rate of these startups exceeded 80% in 2021, the highest rate since 1999. Haltiwanger noted that the rise in new businesses is a strong indicator of job creation, innovation, and productivity growth in the economy. He added that the startup boom not only reflects technological innovation but also significantly fuels it. Startups are exploring how to use new technologies, experimenting with them, and creating new products, forcing competitors to adapt and innovate in response. Research by Texas McCombs, which examined 6,116 patents from the mid-1970s to 2016, highlighted the impact of startups on innovation. The study found that patents from startups were cited 8.5% more often each year and 21% more often over a nine-year period compared to patents from established companies.

Our methodology:

For this article, we searched Insider Monkey’s database of 912 hedge funds through Q2 2024 and selected companies that are actively prioritizing and promoting the development of new and disruptive ideas, products, services, or business processes. From that list, we selected the 10 stocks with the most hedge fund investors and ranked them by increasing hedge fund sentiment. These companies are from a variety of sectors, including healthcare, technology, aerospace, and defense.

Why are we interested in the stocks that hedge funds invest in? The reason is simple: Our research has shown that we can outperform the market by mimicking the top stock picks of the best hedge funds. Our quarterly newsletter strategy selects 14 small- and large-cap stocks each quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).

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International Business Machinery Corporation (NYSE:IBM)

Number of hedge fund owners: 54

International Business Machines Corporation (NYSE:IBM) ranks seventh on our list of the best innovative dividend stocks. The multinational technology company, originally known for its punch card machines, seamlessly transitioned to digital computers as they became the new technology standard. Over time, it has made major advances in software, computer memory, databases, personal computers, and most recently, cognitive computing. These pioneering innovations have laid the foundation for billion-dollar businesses to grow.

International Business Machines Corporation (NYSE:IBM) currently focuses on two core technologies: artificial intelligence (AI) and cloud computing. Since CEO Arvind Krishna took over in 2020 and refocused the company on these areas, it has seen steady revenue growth. The company is now unique in offering a comprehensive set of technologies through its Watsonx platform, along with consulting services for implementing and managing generative AI. While the stock hasn’t performed exceptionally well over the past decade, its strong AI potential has generated impressive returns this year. The stock is up 32.5% since the beginning of 2024 and returned almost 48% last year.

International Business Machines Corporation (NYSE:IBM) reported revenue of $15.7 billion in the second quarter of 2024, up 2% from the same period last year. The revenue also beat analyst expectations by $147 million. The company demonstrated strong cash generation. In the first six months of the year, it generated $6.2 billion in cash flow from operations and had free cash flow of $4.5 billion. Based on the first half of the year, the company is raising its full-year free cash flow forecast, now predicting it will exceed $12 billion.

On July 29, International Business Machines Corporation (NYSE:IBM) announced a quarterly dividend of $1.67 per share, which was in line with the previous dividend. The company has rewarded its shareholders with growing dividends for the past 29 years. What’s more, it returned $1.5 billion in dividends to investors in the most recent quarter. The stock supports an impressive dividend yield of 3.12%, as of September 18.

Insider Monkey’s Q2 2024 database shows that 54 hedge funds held shares in International Business Machines Corporation (NYSE:IBM), up from 49 in the previous quarter. Those holdings are worth a total of $837.5 million. Cliff Asness’s AQR Capital Management was the top shareholder in the company in Q2.

Generally speaking, IBM takes 7th place on our list of the best innovative dividend stocks. While we recognize IBM’s potential as an investment, our conviction is based on the belief that some AI stocks offer greater promise for higher returns, and in a shorter time frame. If you’re looking for AI stocks that are more promising than IBM but are trading at less than 5 times earnings, check out our report on cheapest AI stocks.

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Disclosure: None. This article was originally published on Insider Monkey.