Billionaire Ray Dalio’s former hedge fund is buying these three top dividend stocks. Should I?

Savvy investors often look to billionaire portfolios for quality dividend stock ideas. Ray Dalio, founder of Bridgewater Associates, has an excellent reputation for spotting promising investments. Despite Dalio’s retirement in 2022, his influence remains evident in the hedge fund’s recent moves.

In Q2 2024, Bridgewater Associates purchased shares of three Tier 1 dividend stocks: ExxonMobil (XOM -0.07%), Medtronic (MDT)and Microsoft (MSFT 0.84%). Let’s examine each of these stocks to determine if they deserve a place in your dividend portfolio.

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ExxonMobil: An energy giant with an attractive yield

ExxonMobil, one of the world’s largest integrated oil and gas companies, has long been a favorite among dividend investors. The company offers a compelling yield of 3.29% with a conservative payout ratio of 44.9%. Over the past decade, ExxonMobil has grown its dividend at a modest 2.66% annually.

The stock’s performance was mixed, with a 10-year return of 16.5% excluding dividends. However, when reinvested dividends are included, the total return rises to 80.1%. While impressive, this lags behind S&P 500its total return (including dividends) of 231% over the same period. ExxonMobil currently trades at an attractive forward price-to-earnings (P/E) ratio of 12.1.

Positive catalysts for ExxonMobil include its response to shareholder concerns such as spending cuts, new board appointments and emissions reduction targets. The company’s shift to liquid pricing and high-value integrated operations could improve cash margins, particularly with new volumes from the Permian Basin and Guyana.

However, ExxonMobil faces significant downside risks. The company’s continued investment in long-lived hydrocarbon projects could lead to failed assets if oil demand peaks and declines earlier than expected. In addition, ExxonMobil’s relatively low investments in low-carbon businesses compared to other companies may present challenges in adapting to a changing energy landscape.

Medtronic: A leading innovator in healthcare

Medtronic, a global leader in medical technology, offers a compelling combination of stability and growth potential. The stock yields 3.15%, although its high payout ratio of 93.2% may raise some eyebrows. Over the past decade, Medtronic has grown its dividend at a healthy rate of 6.3% annually.

The company’s stock performance has been modest, with a 10-year return of 38.3% excluding dividends and a total return of 75.7% including reinvested dividends. Like ExxonMobil, it lags the performance of the S&P 500. Medtronic trades at a forward P/E ratio of 16.3.

Medtronic’s growth potential stems from its dominant market position in core cardiac devices, spine products, insulin pumps and neuromodulators. The company’s robust pipeline, including treatments for atrial fibrillation, mitral valve disease and renal denervation for high blood pressure, could open up large new markets. Medtronic’s innovative approach to applying familiar technologies to new medical challenges is another strength.

On the downside, Medtronic faces increasing competition in the insulin pump market, which could threaten its leadership position. The company is also indirectly subject to Medicare reimbursement rates, and increasing pressure on payments could affect profitability. Product recalls, while rare, remain a concern that require ongoing attention and resources.

Microsoft: A tech giant with a growing dividend

Microsoft might not be the first name that comes to mind for dividend investors, but the tech giant has consistently increased its payout. The stock yields a modest 0.73% with a conservative payout ratio of 24.8%. Over the past decade, Microsoft has grown its dividend at an impressive 7.6% annually.

Where Microsoft really shines is in stock performance. The company delivered an amazing 10-year return of 810% ex-dividend and a total return of 965% including reinvested dividends. This significantly outperforms the S&P 500. Microsoft trades at a premium forward P/E ratio of 30.8, reflecting strong growth expectations.

Microsoft’s growth potential is driven by its strong position in the public cloud market with Azure, which benefits from the evolution towards hybrid and public cloud environments. The continued success of Microsoft 365, with customers willing to pay for better security and additional features, is another growth driver. Microsoft’s dominant positions in operating systems and office software serve as cash cows to fuel growth in other areas.

However, Microsoft faces some downside risks. The shift to subscriptions is slowing, especially in mature products like Office. The company lacks a significant mobile presence, which could be a disadvantage in an increasingly mobile-first world. Additionally, Microsoft is not a top player in some of its key growth areas, particularly Azure and Dynamics, which could limit its potential in these markets.

Should you follow Bridgewater’s lead?

Dalio’s Bridgewater Associates bought three diverse dividend stocks, each offering unique attributes for income-focused investors. ExxonMobil offers a high yield and long dividend history, but operates in a rapidly changing energy sector. Medtronic offers stability and growth potential in the high-growth medical industry. Microsoft, while offering a lower yield, has a strong record of dividend growth backed by a strong technology business.

Are these dividend stocks worth buying? For income investors, ExxonMobil, Medtronic and Microsoft are always worth considering. These three companies have demonstrated a strong commitment to rewarding shareholders with regular dividend payments and increases in their quarterly cash distributions. They also have consolidated market positions, ensuring long-term profitability.

So if you’re looking for a trio of top dividend stocks to add to your portfolio, these three Bridgewater Associates holdings might be worth a closer look.