Hedge Funds' Favorite S&P 500 Dividend Aristocrats

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Includes: ABT, ADM, ADP, AFL, APD, CB, DOV, EMR, FDO, JNJ, KMB, KO, LOW, MCD, MMM, PEP, PG, SPGI, SWK, TGT, WBA, WMT, XOM
by: Insider Monkey

The S&P 500 Dividend Aristocrats Index is a very prestigious and popular index among dividend investors. The Index measures the performance of blue-chip S&P 500 companies that have increased their dividends at least 25 consecutive years. The large-cap companies in this index must also have an average daily trading volume of at least $5 million for the six months prior to the index reference date.

In a previous article, we have already indicated that the Dividend Aristocrats Index beat the S&P 500 index over the past 1, 3, 5 and 7 years. Since the beginning of 2011, the companies in the S&P 500 Dividend Aristocrats Index returned 7.05% vs. 6.59% gain for the SPY. Average dividend yield of all stocks in the S&P 500 is 1.81%, while the average dividend yield of all 42 stocks is 2.82%.

As we are concerned about Fed’s loose monetary policy, we believe investors should protect themselves against inflation. We think the Dividend Aristocrats that are able to increase dividends are attractive options for defensive investors that demand better risk-return combination and some inflation protection.

Below, we compiled a list of 23 stocks from the S&P 500 Dividend Aristocrats Index that have at least 20 hedge funds holding the stock. Here are hedge funds’ favorite Dividend Aristocrats:

Stock

Ticker

No of Funds

Johnson & Johnson

JNJ

55

Exxon Mobil Corp

XOM

48

Abbott Laboratories

ABT

43

McDonald's Corp

MCD

43

Procter & Gamble

PG

40

Coca-Cola Co

KO

38

Lowe's Cos Inc

LOW

38

PepsiCo Inc

PEP

38

Wal-Mart Stores

WMT

37

Target Corp

TGT

35

Emerson Electric Co

EMR

34

Stanley Black & Decker

SWK

31

Dover Corp

DOV

30

AFLAC Inc

AFL

28

Family Dollar Stores Inc

FDO

27

Kimberly-Clark

KMB

27

3M Co

MMM

26

Walgreen Co

WAG

26

Air Products & Chemicals

APD

25

Chubb Corp

CB

25

Archer-Daniels-Midland Co

ADM

22

McGraw-Hill Cos Inc

MHP

21

Automatic Data Processing

ADP

20

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Johnson & Johnson is the most favorite Dividend Aristocrat among the 300+ hedge funds we are tracking. There were 55 funds in JNJ investing nearly $5 billion at the end of March. Johnson & Johnson is a US company providing consumer health care and pharmaceutical products worldwide. JNJ has a 3.4% dividend yield and returned 9.8% since the beginning of this year. The stock has a market cap of $183B and a P/E ratio of 15. Warren Buffett holds more than $2 billion of JNJ (See Warren Buffet’s other massive holdings).

Exxon Mobil ranks second with 48 hedge funds investing more than $2.5 billion. Exxon Mobil’s dividend yield is slightly more than 2% which is on the low side. Phill Gross’ Adage Capital and Ken Fisher’s Fisher Asset Management are the top holders with around $600 million invested at the end of March.

Abbott Labs and McDonald’s share the third spot with 43 hedge funds. Hedge funds had more around $1.7 billion in ABT and $1.4 billion in MCD. Abbott Laboratories is a multinational pharmaceutical company. ABT has a 3.6% dividend yield and returned 13.5% since the beginning of this year. The stock has a market cap of $82B and a P/E ratio of 18. Ken Fisher also had more than $400 million in ABT at the end of March 2011. (See Ken Fisher’s other large stock picks here).

McDonald's Corp is a large fast-food chain operating worldwide. MCD has a 2.9% dividend yield and returned 14.1% since the beginning of this year. The stock has a market cap of $89B and a P/E ratio of 18. Both Peter J. Eichler Jr. and James Crichton hold more than $150 million of MCD. Ric Dillon and Jim Simons are also among MCD investors. (See Jim Simons’s favorite stocks)

We think a portfolio of these 23 stocks will provide ample diversification for investors and their high dividend yields will deliver higher returns than long-term treasury bonds over the next 10 years. Another important point about investing in these stocks is that hedge funds don’t usually buy these for dividends. They buy these for capital gains. That’s why we also think these stocks will most likely deliver attractive returns through capital gains.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.