Wall Street offers patient investors of all stripes the opportunity to grow their wealth. But among these seemingly countless strategies, few have produced more consistent returns than buying and holding high-quality dividend stocks over long periods of time.
Recently, Hartford Funds updated a report that, in collaboration with Ned Davis Research, examined the performance of non-paying dividend stocks over the past 50 years (1973-2023). Hartford Funds found that dividend payers generated an average annual return of 9.17% over half a century and were about 6% less volatile than the benchmark S&P 500. By comparison, non-payers earned a far less impressive average annual return of 4.27% over half a century, sitting at 18%. more more volatile than the S&P 500.
Companies that regularly pass on a percentage of their profits to investors tend to be consistently and proven profitable. In other words, they have the right ingredients to gain value in the long term.
The outperformance of dividend stocks hasn’t gone unnoticed by Wall Street’s brightest minds. Quarterly Form 13F filings allow investors to track which dividend stocks billionaire money managers have bought, sold and held.
In the December quarter, billionaires were quite active in a trio of widely owned and extremely high-yielding dividend stocks – “ultra-high yield” in the sense that they have yields at least four times higher than the S&P 500. While With two of these income giants on the chopping block, a surprisingly high-profile dividend stock was suddenly purchased.
#1 Ultra-High-Yield Dividend Stock That Billionaires Have Sent to the Chopping Block: Verizon Communications (6.51% Yield)
The first dividend stock to get the spotlight from more than half a dozen prominent billionaires in the fourth quarter is the telecommunications giant Verizon Communications (NYSE:VZ). In total, seven billion-dollar asset managers have reduced or eliminated the shares of their respective funds, including (total shares sold in brackets):
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John Overdeck and David Siegel of Two Sigma Investment (3,314,607 shares)
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Israel Englander from Millennium Management (2,830,060 shares)
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Ken Griffin of Citadel Advisors (2,106,623 shares)
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Jeff Yass of Susquehanna International (1,844,350 shares)
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Steven Cohen of Point72 Asset Management (1,458,200 shares)
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Jim Simons of Renaissance Technologies (834,522 shares)
One obvious reason for this aggressive selling is the Federal Reserve’s restrictive monetary policy. Since March 2022, the country’s central bank has raised its federal funds target rate by 525 basis points. The fastest rate hike cycle in four decades will make future refinancings and/or deals more expensive for telecom stocks like Verizon that are carrying a ton of debt.
Another catalyst that may have pushed billionaires to the proverbial heights is the July report from The Wall Street Journal that supposedly legacy telecommunications companies could face huge cleanup costs and health-related liabilities associated with the use of lead-clad cables. Verizon conducts its own testing and finds that lead-clad cables make up only a small portion of its network.
The more important caveat to this WSJ According to the report, any determination of fault and financial liability (if any) would be made by the US court system. In such cases it usually takes several years until a judgment and/or amount is received. While WSJ This raises potentially valid concerns for Verizon and its shareholders, but it won’t impact the company’s balance sheet or bottom line any time soon.
Finally, billionaires may simply opt for greater growth opportunities in the new bull market. Because Verizon is a mature company, revenue growth is expected to be in the low single digits. For example, full-year mobile service revenue increased 3.2% last year.
But don’t mistake Verizon’s slower growth pace for weakness. Modernizing its network to support 5G download speeds has led to a renewed increase in net broadband additions, which has the potential to encourage bundling of high-margin services.
#2 Ultra-High-Yield Dividend Stock That Showed Billionaires the Door: AGNC Investment (14.72% Yield)
A second extremely high-yielding dividend stock that high-performing billionaires applied to exit in the fourth quarter is Mortgage Real Estate Investment Trust (REIT). AGNC investment (NASDAQ:AGNC). Despite the eye-popping 14.7% return, six billion-dollar asset managers sold their shares, including (total shares sold in brackets):
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Israel Englander from Millennium Management (2,332,796 shares)
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Jeff Yass of Susquehanna International (1,559,922 shares)
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John Overdeck and David Siegel of Two Sigma Investments (1,501,624 shares)
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Ken Griffin of Citadel Advisors (300,555 shares)
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Steven Cohen of Point72 Asset Management (14,400 shares)
Similar to Verizon, rapidly rising interest rates may be why billionaire asset managers have scared away AGNC.
Mortgage REITs are companies whose goal is to borrow money at low, short-term interest rates and use that capital to purchase higher-yielding long-term assets such as mortgage-backed securities (MBS), hence the industry’s name. As interest rates rose to their highest levels in four decades, the cost of short-term borrowing skyrocketed. As a result, the net interest margin and book values of AGNC and its competitors declined. Most mortgage REITs tend to trade very close to their respective book values.
Additionally, we are experiencing the longest treasury yield curve inversion in history. Yield curve inversion occurs when short-term government bonds have higher yields than government bonds with a maturity of 10 or 30 years. Yield curve inversions have historically preceded every U.S. recession since World War II, but they do not guarantee that a recession will occur.
While there are numerous reasons to be concerned about AGNC’s near-term prospects, history shows that buying mortgage REITs is often a smart move when things look worst. When the yield curve eventually normalizes, AGNC’s net interest margin and book value should recover.
Additionally, almost all of AGNC Investment’s $60.2 billion investment portfolio is tied up in highly liquid “agency” assets. An agency security is backed by the federal government in the event of a default. This additional protection allows AGNC to use leverage to its advantage. This is also the main reason why AGNC can maintain its high double-digit return.
The billionaires with ultra-high-yield dividend stocks bought with the fist: Philip Morris International (5.71% yield)
But not all high-yield dividend stocks were off-limits to billionaire investors in the December quarter. Among the dozens of widely held stocks with top returns, tobacco was the one that five billionaires couldn’t afford to buy (Yestobacco supply!) Philip Morris International (NYSE:PM). Top buyers included (total number of shares purchased in parentheses):
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Ole Andreas Halvorsen from Viking Global Investors (3,652,163 shares)
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Stephen Mandel of Lone Pine Capital (3,005,791 shares)
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Steven Cohen of Point72 Asset Management (1,156,227 shares)
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Israel Englander from Millennium Management (161,327 shares)
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Ray Dalio of Bridgewater Associates (97,886 shares)
What’s surprising about the billionaires investing in Philip Morris stock is that smoking rates among adults in developed countries have largely declined. As consumers have become more aware of the potential long-term dangers of tobacco use, cigarette shipments have declined.
However, geographic diversity is a clear competitive advantage for Philip Morris. This is a company whose products are available in around 180 countries. If cigarette shipments weaken in some developed markets, there is a good chance that demand from faster-growing emerging markets will offset this weakness.
Another advantage of Philip Morris is its pricing power. Tobacco products contain nicotine, an addictive chemical. History has shown that smokers are willing to accept steep price increases to continue their habit. This exceptional pricing power helps the company counteract weakness in cigarette shipments in developed countries.
But the most important catalyst for Philip Morris International may be its push into smoke-free products, such as the company’s IQOS heated tobacco system. In 2023, shipments of heated tobacco devices increased nearly 15%, and the company’s share of the global heated tobacco market increased 120 basis points to 9.1%.
At 13 times forward year earnings, Philip Morris trades at a 14% discount to its average forward year multiple over the last five years.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool recommends Philip Morris International and Verizon Communications. The Motley Fool has a disclosure policy.
2 Ultra-High Dividend Yield Stocks Billionaires Are Selling and the Surprising High-Profit Stock They Can’t Buy Anymore was originally published by The Motley Fool