According to Ned Davis Research, dividend stocks have outperformed the S&P500 by 2.5% per year over the past 36 years. The outperformance is even more striking when returns on dividend stocks are compared with returns on stocks that don't pay dividends; dividend payers outperform non-payers by a wide margin of 8% annually. In a scarce-yield environment, investors have flocked to dividend-paying stocks that offer security and income. Hedge fund managers have also found good value and income plays among dividend-yielding stocks.
Goldman Sachs has just released its Q1 2012 Hedge Fund Trend Monitor report, which features a list of 50 stocks that are most widely owned by hedge funds. The list includes the names of several major dividend income plays. Here is a sample of dividend stocks in the top 20 holdings that were most widely owned by hedge funds in the first quarter of 2012.
Apple (AAPL) was the single most widely owned stock by fund managers in the first quarter. The stock was a top holding in the portfolios of some 106 hedge funds. With market capitalization of $524 billion, Apple is the largest publicly-traded company in the world. It is also the largest technology company by revenue and net income. The company sells a variety of consumer electronics, including computers and software. Its famous trademarks include iPhone, iPad, Mac, and iPod. Apple has seen spectacular growth, with its earnings per share projected to surge a spectacular 70% in 2012.
In March 2012, the company announced plans to initiate a quarterly dividend of $2.65 a share starting in the company's fiscal fourth quarter which begins on July 1, 2012. At current prices, the annualized dividend will yield 1.9% on a payout ratio of 26% of trailing-twelve-month earnings. Its peers, namely Microsoft (MSFT) and Hewlett-Packard (HPQ), pay dividends yielding 2.8% and 2.4%, respectively. Competitors Google (GOOG) and Dell (DELL) do not pay any dividends. Apple seems to be fairly priced at the current price. Guru investors David Einhorn, John Griffin, David Tepper, and Dan Loeb are bullish about the company.
Microsoft ranked fourth on the list of 50 most widely-held stocks by hedge funds in the first quarter of 2012. In total, 46 hedge funds disclosed Microsoft as a major holding in their portfolios. The company has $244 billion in market capitalization, which makes it the third largest publicly-listed company. Microsoft sells and licenses software products, enterprise consulting services, online information and content services, gaming consoles, and other products and services. The company is projected to post a 28% in earnings per share this year, followed by a more modest increase of close to 12%.
Microsoft pays a dividend yield of 2.8% on a low payout ratio of 23%. The software giant has increased dividends at an average rate of 14.3% a year over the past five years. Trading at $29 a share, Microsoft is undervalued vis-à-vis its industry and the market. The company's rival Google does not pay dividends, while Oracle (ORCL) pays a dividend yielding 0.9%. After July 1, 2012, its competitor Apple will initiate a dividend yielding 1.9% at current prices. Fund managers Donald Yacktman, Jean-Marie Eveillard, and Ken Fisher are fans of the stock.
JPMorgan Chase (JPM) ranked ninth on the list of 50 most widely held stocks by hedge funds. In the first quarter of 2012, some 27 hedge funds reported owning this $128 billion multinational bank. With $2.3 trillion in assets, JPMorgan is the largest U.S. bank by assets. The bank is currently shaking up its risk committee after a reported a $2 billion trading loss, which derivative traders now think will end up being as high as $7 billion. Since the report, the bank's credit rating was cut by one notch, while the U.S. President and other officials called for new regulatory reforms in the financial services industry.
The bank pays a dividend yielding 3.5% on a low payout of 18%. The company's peers, such as Citibank (C), Bank of America, and Wells Fargo (WFC), pay dividend yields of 0.2%, 0.6%, and 2.8%, respectively. The company has a low P/E of 6.9, below the industry's and the bank's 5-year average ratios. The company's 7.6 forward P/E is well below the industry's forward ratio of 10.2. The stock is currently trading at $33.5 a share, down 4.3% year-to-date. Among fund managers, Ken Fisher, Lee Ainslie, and Richard Pzena are major investors in the company.
British Petroleum (BP) was at number 12 on the list of 50 most widely held stocks by hedge funds. Twenty three hedge funds disclosed owning the stock in the first quarter of 2012. The company has $121 billion in market capitalization.
The oil company pays a dividend yielding 5% on a payout ratio of 21%. The company's peers, including Chevron (CVX), ConocoPhillips (COP), and Exxon Mobil (XOM), yield 3.6%, 5.1%, and 2.8%, respectively. With a P/E of 5, British Petroleum is priced well below the industry's P/E ratio of 7.7. Its forward P/E of 6 is below the industry's forward P/E of 7.8. The stock is popular with Seth Klarman and Richard Pzena.
Pfizer (PFE) was ranked number 13 on the list of the most popular stocks with hedge funds. Twenty three hedge funds reported owning Pfizer stock in their portfolios in the first quarter of 2012. Pfizer is a $167 billion drug manufacturer selling a wide range of pharmaceutical products including high cholesterol drug Lipitor, erectile dysfunction drug Viagra, and anti-inflammatory medicine Celebrex.
The drug maker sports a dividend yield of 4.0% on a payout ratio of 63%. Pfizer's rivals, Eli Lilly (LLY), Merck (MRK), and GlaxoSmithKline (GSK), pay dividend yields of 4.8%, 4.5%, and 5%, respectively. On a price-to-earnings basis, the company currently appears overpriced. Its forward P/E is 10.1, well above the industry ratio of 6.4. Among fund managers, Ken Fisher and Donald Yacktman are fans of the stock.
LyondellBasell Industries (LYB) was listed as number 17 on the list of most widely owned stocks by fund managers. Twenty fund managers disclosed owning the company in their portfolios in the first quarter of 2012. LyondellBasell Industries is a $23 billion chemical producer, the world's third largest independent chemical company.
LyondellBasell Industries has a dividend yield of 4.1% on a payout ratio of 154%. Its peers Kraton Performance Polymers (KRA) and American Pacific Corporation (APFC) do not pay dividends. Huntsman Corporation (HUN) pays a dividend yield of 3.1%. LyondellBasell Industries' P/E is favorable compared to the industry and the S&P500's. The company is trading 7.8 times its forward earnings, on par with its industry. Fund managers Andreas Halvorsen and John Burbank are bullish about the stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.