Dividends are a great way to collect income at a time when interest rates are near historical lows. Billionaire Jim Simons just so happens to have five dividend paying stocks in his top ten, with four being in his top four. All of these stocks pay a dividend that yields in excess of 3%.
Simons founded the popular investment firm Renaissance Technologies (RenTech) in 1982 and now manages some $34 billion. Over the last few years, RenTech's hedge funds have used a variety of models for investing that are based on analyzing as much data as can be gathered and then looking for non-random movements to make predictions (check out Simons' cheap stock picks).
As for why we look at dividend paying stocks, ISI group examined the contribution of dividends to the total return of the S&P 500 from 1930 through 2011. Over that period, dividends provided a contribution of greater than 50% to the total return of companies on the S&P 500 on average.
Simons loves pharma
Two of Simons' big dividend payers are from the pharma sector, the first being Bristol Myers Squibb (BMY), which also happens to be RenTech's largest public equity holding. His other major pharma pick is Eli Lilly (LLY), which is his third largest holding.
Bristol Myers pays a dividend yielding 3.5% and earnings have been trending near flat (year over year basis) of late due to reduced sales from patent expiration (2012) in the U.S. for Avapro/Avalide and Plavix. However, its robust product portfolio should help hedge future earnings contractions. The company manufactures and sells branded pharmaceutical drugs such as Baraclude (hepatitis B virus), Sustiva (HIV) and Erbitux (cancer).
Its 2009 divesture of infant formula maker Mead Johnson has put the company squarely as a higher-growth biopharmaceutical company. It is furthering that distinction with its acquisition of Amylin Pharmaceuticals in August 2012 for around $7 billion, in partnership with AstraZeneca (AZN). This should be one of the long-term growth drivers for the pharma company.
Apart from its current drugs and acquisitions, Bristol-Myers also has a solid pipeline. This includes its type II diabetes treatment Forxiga, which already has approval in Europe and is awaiting approval in the U.S., which would help boost the company's revenues given the type II diabetes addressable market size (see if "big pharma" is better for investors).
Eli Lilly pays a dividend yielding 3.5% and is another major pharma company. Part of what we like about Eli Lilly is the wide range of products that its portfolio has. The company focuses on central nervous system disorders, metabolic diseases, autoimmune diseases, cardiovascular diseases and cancer, which are all high growth areas and represent significant commercial potential. However, the impending loss of exclusivity in the U.S. for its Cymbalta drug will hurt revenues, which has caused the company to trade below major peers on a valuation basis. Eli Lilly trades at 15 times earnings, whereas Pfizer (PFE) and Merck (MRK) trade at 22 times.
Yet, it appears the company has a number of products and initiatives that should carry it through, including its animal health segment. Emerging markets should also help lead the way. This includes diffusing a number of key products across Japan, such as Zyprexa, Alimta, Cymbalta and Gemzar. Its reported that Zyprexa will continue to excel in Japan since the product does not lose exclusivity until late 2015 in that country. Lilly also has some 53 compounds in its R&D pipeline, including 13 drugs in phase 3 trials or under regulatory review.
Even with losing exclusivity on Cymbalta, the company is expecting to generate $4 billion each year through 2014, which should easily cover its expected $900 million in capital expenditures and $2.1 billion in dividends over that period.
Simons on tech
Simons and RenTech have tech giant Intel (INTC) as its second largest holding, and the stock also happens to be the highest yielding dividend stock listed, with a 4.2% dividend yield.
Intel is still the leader in the microprocessor market, holding the number one position in market share. Although the company has been pressured by the wide-spread decline in PC demand, what's intriguing about Intel is its dominant position in the high-margin server and data centers. Data centers should be a rapidly growing segment going forward given the move toward cloud computing. The stock is down over 20% the last twelve months, but has managed to beat consensus estimates in each of the last four quarters. Intel is also one of billionaire Michael Price's "high-value-high-dividend" stock picks (see all five).
Intel has managed to grow its operating profit at a five year annualized growth rate of 7.6%, while expanding its gross margin by some 774 basis points over that same time period. The company's solid cash flow generating capabilities should help it continue to pay a robust dividend to investors, with a current payout ratio of roughly 40%. Intel is also on the cheap side of the industry when compared to other major semiconductor companies. Intel currently only trades 10 times earnings, compared to Marvell Tech (MRVL) (19 times), Texas Instruments (TXN) (23 times) and NIVIDIA (NVDA) (14 times).
Simons likes tobacco and fast food
Not necessary the best combo when mentioned out of context, but tobacco and fast food happen to be two great picks for adding dividends to one's portfolio. Simons' big tobacco play is Phillip Morris International (PM), which is RenTech's fourth largest holding, and McDonald's (MCD) is eighth.
Phillip Morris pays a 3.7% dividend yield and owns a large portion of the international tobacco market share, consistently maintaining a market share of between 27% and 28% from 2010 to 2012. Its broad portfolio includes the popular names Marlboro, L&M, Parliament, Philip Morris, Virginia Slims and Champion. Last quarter the company recorded growth in all its geographic region first time since 2008.
Future growth is expected to be driven by Asia, including Indonesia, China and Korea. The Asia-Pacific region contributed over 35% of operating income in 2012, well above the 25% in 2010. Philip Morris expects further growth in 2013, with guidance that shows expected earnings growth of 10% to 12%. Phillip Morris is also one of five smokin' dividend plays (see all five).
McDonald's, paying a 3.1% dividend yield, is also the world's largest fast food chain, operating in over 100 countries. What's more, is that even though the company has an enormous footprint, it actually only holds around 9% of the $1 trillion fast food market share. There appears to be no slowing down for the company with respect to expansion. McDonald's spent $2.6 billion on store openings and renovations in 2011, $2.9 billion in 2012 and plans to spend $3.2 billion in 2013. These infrastructure and expansion investments are expected to help the company meet its continued long-term target of 3% to 5% sales growth and 6% to 7% operating income growth.
What makes McDonald's a solid investment is it couples strong expected earnings growth with a commitment to returning capital to shareholders. The fast food company returned $5.5 billion to shareholders in the form of share repurchases and dividend payments in 2012. McDonald's also has a history of increasing its dividend every year since it started paying a dividend in 1976.
Jim Simons retired from RenTech in 2010, but is still an active part of the stock selecting process. While reviewing Simons and RenTech's $34 billion public security portfolio, it turns out that five of the firm's top ten stocks are heavily weighted toward robust dividend paying stocks, all of which appear to be solid buys across a variety of industries.