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The market was pretty volatile over the past year. It was hit by the European debt crisis in the summer and lost nearly 10%, but it started to recover later. Overall the market returned 2.5% over the past 52 weeks. Most stocks with high dividend yields outperformed the market in that period, and a certain number of them delivered double-digit returns.

We are concerned about the Fed’s inflationary monetary policies, and we encourage investors to play more defensively by purchasing high dividend stocks. One of the most practical ways of picking good dividend stocks is to focus on the stocks that hedge funds love the most. We use the number of hedge funds in each stock to determine each stock's popularity. Stocks with at least 25 hedge funds are more popular than 95% of the stocks. Stocks with at least 20 hedge funds are in the top 10%, and stocks with at least 10 hedge funds are in the top quartile. In this article we include the high-dividend stocks that are in the top quartile in terms of popularity.

Below, we compiled a list of large cap S&P 500 stocks with high dividend yields. The market data are sourced from Finviz. These stocks have market capitalizations above $10 billion, annualized dividend yield of at least 4%, and generated double-digit returns over the past 52 weeks. We ranked these stocks by the number of hedge funds tracked by Insider Monkey that reported they had the stock in their 13F portfolios as of September 30, 2011.

Ticker

Company

Dividend

Return

No of HF

PFE

Pfizer Inc.

4.01%

29.46%

74

MRK

Merck & Co. Inc.

4.39%

11.30%

42

VZ

Verizon

5.03%

14.96%

33

LMT

Lockheed Martin

4.88%

22.45%

30

MO

Altria Group Inc.

5.74%

23.58%

28

LLY

Eli Lilly & Co.

4.69%

26.06%

25

LO

Lorillard, Inc.

4.59%

45.61%

23

DUK

Duke Energy

4.63%

27.55%

21

AEP

American Electric Power

4.61%

18.24%

21

PPL

PPL Corporation

4.86%

14.05%

21

SO

Southern Company

4.20%

22.86%

20

FE

FirstEnergy Corp.

5.14%

19.68%

18

PGN

Progress Energy Inc.

4.51%

32.87%

16

RAI

Reynolds American Inc.

5.43%

33.39%

15

EQR

Equity Residential

4.01%

10.85%

14

HCN

Health Care REIT, Inc.

5.19%

20.38%

11

HCP

HCP, Inc.

4.58%

17.97%

10

The most popular solid dividend stock is Pfizer Inc (NYSE:PFE). At the end of September, there were 74 hedge funds with Pfizer positions in their portfolios. Among them, Ken Fisher’s Fisher Asset Management had the largest Pfizer position. The fund disclosed to own $389 million worth of Pfizer shares at the end of the third quarter. Pfizer has a dividend yield of 4.01% and it returned 29.46% over the past 52 weeks. The stock has a market cap of $169B and a P/E ratio of 17.3.

Merck & Co Inc (NYSE:MRK) is also very popular among hedge funds tracked by us. As of September 30, there were 42 hedge funds reported to own Merck in their portfolios. For example, Ric Dillon’s Diamond Hill Capital disclosed owning $155 million worth of Merck shares at the end of the third quarter. Merck has a dividend yield of 4.39% and it returned 11.30% during the past 52 weeks. It has a market cap of $117B and a P/E ratio of 26.23.

The best-performing high-dividend stock on the list above is Lorillard Inc (NYSE:LO), which gained 45.61% during the past 52 weeks. At the end of September, there were 23 hedge funds with Lorillard positions in their 13F portfolios. For example, Jim Simons’ Renaissance Technologies had more than $300 million invested in Lorillard. Jean-Marie Eveillard’s First Eagle Investment Management also invested $200+ million in this stock. Lorillard has a dividend yield of 4.59%. It has a market cap of $15.3B and a P/E ratio of 15.24.

Other rock-solid high-dividend stocks that hedge funds love include Verizon Communications Inc (NYSE:VZ), Lockheed Martin Corporation (NYSE:LMT), Altria Group Inc (NYSE:MO), Eli Lilly & Co (NYSE:LLY), Duke Energy Corporation (NYSE:DUK), American Electric Power Co Inc (NYSE:AEP), PPL Corporation (NYSE:PPL), Southern Company (NYSE:SO), FirstEnergy Corp (NYSE:FE), Progress Energy Inc (NYSE:PGN), Reynolds American Inc (NYSE:RAI), Equity Residential (NYSE:EQR), Health Care REIT Inc (NYSE:HCN), and HCP Inc (NYSE:HCP).

We think a portfolio of these 17 stocks can provide adequate diversification for investors. We like dividend stocks, and we expect that high-dividend stocks will outperform long-term Treasury bonds over the next 10 years. Moreover, the popularity of these 17 stocks among hedge funds indicates that these stocks can generate decent returns not only through their high dividend yields, but also by providing strong capital gains.

Source: 17 Rock-Solid, High-Yield Stocks Hedge Funds Love