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Hedge funds usually don’t invest in dividend stocks because these are generally defensive stocks with little growth and they are generally efficiently priced. Hedge funds invest in misunderstood securities that are mispriced by the market. They view dividend stocks as long-term treasury bond substitutes. However, sometimes dividend stocks are mispriced and that’s when hedge funds start investing in these stocks.

We gathered the holdings of the top 175 equity hedge funds and analyzed their investments in high dividend large-cap stocks. Here are the hedge funds’ top 30 dividend stocks that yield at least 4% and have a dividend payout ratio of at most 67%. The dividend data is sourced from Fidelity.

Company Name

Symbol

Dividend Yield

HF Holdings (Millions)

Number of Hedge Funds

LORILLARD INC

(NYSE:LO)

5.3

670

20

VODAFONE GROUP PLC

(NASDAQ:VOD)

4.6

584

23

MERCK & CO INC.

(NYSE:MRK)

4.5

491

19

GLAXOSMITHKLINE PLC

(NYSE:GSK)

6.1

348

11

BRISTOL-MYERS SQUIBB CO

(NYSE:BMY)

4.8

276

15

KKR & CO LP

(NYSE:KKR)

6.6

229

13

ELI LILLY AND CO

(NYSE:LLY)

5.5

192

17

OLD REPUBLIC INTL

(NYSE:ORI)

5.4

156

8

R.R. DONNELLEY & SONS

(NASDAQ:RRD)

5.4

156

14

KIMBERLY-CLARK CORP

(NYSE:KMB)

4.3

146

18

PG&E CORP

(NYSE:PCG)

4.2

139

7

MOBILE TELESYSTEMS

(NYSE:MBT)

4.9

126

8

CMS ENERGY CORP

(NYSE:CMS)

4.4

120

10

PITNEY BOWES INC.

(NYSE:PBI)

5.9

109

8

GARMIN LTD

(NASDAQ:GRMN)

4.4

106

12

CINEMARK HOLDINGS INC

(NYSE:CNK)

4.3

106

10

BCE INC.

(NYSE:BCE)

5.5

102

9

NOVARTIS AG

(NYSE:NVS)

4.3

95

13

CENTERPOINT ENERGY INC.

(NYSE:CNP)

4.6

94

7

ENTERGY CORP.

(NYSE:ETR)

5.1

92

9

KT CORP

(NYSE:KT)

4.6

92

5

PPL CORP

(NYSE:PPL)

5.2

87

9

BLACKSTONE GROUP LP

(NYSE:BX)

7.1

78

5

NISOURCE INC.

(NYSE:NI)

4.9

77

11

ASTRAZENECA PLC

(NYSE:AZN)

7.6

69

8

NATIONAL GRID

(NYSE:NGG)

4.3

66

5

PUBLIC SERVICE ENTERPR

(NYSE:PEG)

4.5

65

9

SOUTHERN COPPER CORP

(NYSE:SCCO)

6.1

62

11

CELLCOM ISRAEL LTD

(NYSE:CEL)

12.1

61

3

TECO ENERGY INC.

(NYSE:TE)

4.4

58

10

Lorillard tops our list of hedge funds’ favorite stocks. Lorillard’s price was depressed at the end of 2010 because of regulatory issues about its menthol products. Hedge funds saw the opportunity and bought this high dividend stock. The stock was trading at $80.70 at the end of 2010. It was trading around $76 when hedge funds filed their 13F reports with the SEC on February 15th. So outsiders had ample time to imitate hedge funds’ holdings.

In the middle of March the FDA published a report and it became clear that the menthol ban is very unlikely. Lorillard took off. Today, the stock trades at $98.59. Investors who bought LO on February 15th gained around 29% in less than two months. Jim Simons’ Renaissance Tech is the biggest winner in this stock. They had $360 Million invested in LO.

The second pick in our list is Vodafone. David Einhorn’s Greenlight Capital has a large investment in Vodafone. They revealed their position at the beginning of 2010. Einhorn thinks Vodafone is undervalued because the market isn’t taking into account its Verizon Wireless (NYSE:VZ) stake when valuing Vodafone. Einhorn said he is happy to collect a fat dividend check until Verizon Wireless starts distributing a dividend or Vodafone’s stake is bought by Verizon.

We imitated Einhorn’s pick and bought Vodafone below $22. Today, Vodafone trades near $29. Vodafone returned 9% so far in 2011. Boykin Curry’s Eagle Capital, Mason Hawkins’ Southeastern Asset Management and Leon Cooperman’s Omega Advisors are among the funds with large VOD positions.

This list is a starting point for dividend lovers who want to enjoy meaningful capital gains as well. We believe dividend stocks will outperform the 10-year treasury bonds over the next 10 years.

Source: Top 30 Dividend Stocks That Hedge Funds Love