By Matt Doiron
Contrary to the beliefs of many investors, there are a number of ways to use quarterly 13F filings to help deliver good returns. First, the included information can be used to help develop investment strategies; we have found, for example, that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year (learn more about our small cap strategy) and our own portfolio based on these techniques beat the market by 33 percentage points in the last 11 months. We can also screen managers' picks for stocks which satisfy a number of criteria, including those paying high yields. Read on for our thoughts on the five largest stock positions in billionaire Ken Griffin's Citadel Investment Group's 13F portfolio, which currently pay a dividend yield of 3% or higher, see the full filing on the SEC's website, or check out the fund's stock picks over time.
Griffin and his team increased the size of their position in Pfizer (PFE) to a total of 8.6 million shares. The large pharmaceutical company has been selling off or spinning out some of its non-core assets, which bulls hope will result in management becoming more efficient in running the remaining operations. Pfizer pays a quarterly dividend of 24 cents per share, which makes for an annual yield of 3.4%. We'd also note that the stock appears reasonably priced according to Wall Street analyst expectations at a forward P/E of 12.
Another high-yield large cap stock in Citadel's portfolio at the end of June was Lockheed Martin (LMT). Despite concerns over cuts in federal military spending- and, in fact, Lockheed Martin has been reporting lower revenue- earnings have actually been up at least temporarily from their levels a year ago. The dividend yield here is 3.8%, and with demand for defense contractors normally being disconnected from the overall economy the stock boasts a beta of only 0.6 making it a potential defensive stock. We'd be interested in looking at Lockheed Martin compared to its peers.
The fund added to its stake in AvalonBay Communities (AVB), a $16 billion market cap real estate investment trust which owns residential communities across the U.S. Real estate investment trusts receive favorable tax treatment conditional on distributing a large share of taxable income to shareholders, which often results in high yields. AvalonBay- which did not cuts its dividends through the financial crisis and recession- recently increased its quarterly payments and now offers a 3.5% yield. We'd note, however, that the stock is down 14% in the last year against a rising market.
Citadel also liked Starwood Property Trust (STWD), disclosing ownership of 5.6 million shares. Starwood is another real estate investment trust, which invests in commercial and residential mortgage loans and mortgage-backed securities. While Starwood only became publicly traded in mid 2009, we'd imagine that this means that the stock is vulnerable to economic shocks. Markets also consider it a fairly risky investment, given its investment portfolio, and so it is also a high returner on an income basis with a dividend yield of more than 7%. Investors willing to take on mortgage REIT risk may be interested in comparing Starwood to its peers.
The filing shows Griffin with a little over 3 million shares of Arthur J Gallagher (AJG) in his portfolio at the end of the second quarter of the year. Gallagher is a $5.5 billion market cap insurance broker and provider of risk management solutions. While the trailing earnings multiple is a bit high, at 24, the company recorded significant increases in both revenue and earnings last quarter compared to Q2 2012 and based on analyst expectations the forward P/E is a more reasonable 17. At current prices and dividend levels, the stock pays a yield of 3.3%.