By Usman Rafi
With the current 10-year Treasury rate hovering around 1.95%, bonds have lost their attractiveness as a form of fixed income investment. Combine this with a 2% to 3% annual inflation and the picture starts to look even bleaker, especially for investors who are close to their retirement age and want to maximize their gains over the next couple of years. Keeping this in mind, we believe that dividend stocks might be a better alternative. However, there is another concern facing soon-to-be retired individuals, and that is financial security. They can't afford to chase high yields that bear much greater risk than the Treasury bonds, and then there is also the question of stability of the yield. In this regard, we have formulated a list of five dividend stocks that have not reduced their dividends for the last 10 years, and have received the greatest interest from hedge funds. They include Air Products & Chemicals (APD), McDonald's Corporation (MCD), Johnson & Johnson (JNJ), Microsoft Corporation (MSFT), and Williams Companies (WMB).
Hedge funds have not invested in these companies for the sole purpose of dividends. They are in for the long haul and while they wait for the capital appreciation to take place, they feast on this stable supply of dividends. Our research, which is based on tracking these hedge funds for more than 15 years has revealed that the 50 most popular large cap stocks among these firms underperformed the market by an average of 7 basis points per month between 1999 and 2012. In contrast to this, our small cap strategy, which is based on 15 most popular small caps among hedge funds and insiders outperformed the market by nearly a percentage point per month on average. The strategy has performed exceptionally well during forward tests as well, since it outperformed the S&P 500 by nearly 80 percentage points to return 132% from August 2012 onwards (read more details here). Hence investors need to be smart about following hedge funds in a way that maximizes their returns and refrain from blindly following their large cap picks.
Moving on to the first pick, Air Products & Chemicals, Inc hasn't reduced its dividend for the last 32 years. The company is also one of the hedge funds' favorite Dividend Aristocrats and has a current yield of 1.97%. At the end of the fourth quarter 82 hedge funds had an aggregate investment of $8.92 billion in the company compared to 71 funds with $7.87 billion in the previous quarter. Bill Ackman's Pershing Square is one of these shareholders with 20.55 million shares valued at $2.96 million.
Air Products & Chemicals, Inc. is up nearly 31% over the year as the company is in the midst of reorganization, which has been going on since Ackman took an activist stake in the company during 2013. The company hired a new CEO, Ghasemi Seifi, following the activist intervention. He made an insider purchase in February this year involving some 27,000 shares of Air Products & Chemicals, Inc. valued at approximately $4.15 million, which proves his strong belief in the company's turnaround.
Microsoft Corporation has been increasing its dividends every year since the end of 2010. The last increase of 10.7% brought the quarterly dividend to $0.31. Dividend yield stands at 2.83%. The tech giant is in the process of launching its Surface Pro 3 tablet, which could come out as early as next month. Microsoft Corporation is very popular among hedge funds as 114 funds had $17.87 billion invested in the company at the end of the fourth quarter versus 119 hedge funds with $19.66 billion in the previous quarter. Jeffrey Ubben's Valueact Capital holds some 74.24 million shares valued at $3.45 billion.
McDonald's Corporation sports a dividend yield of 3.44%. The last quarterly dividend hike came in the fourth quarter as the payout rose to $0.85 from $0.81 in the third quarter. Mason Hawkins' Southeastern Asset Management is the highest shareholder among over 700 hedge funds that we track, with 11.92 million shares of McDonald's Corporation valued at $1.12 billion.
The fast food retailer is also undergoing a change in its business strategy to counteract two years of declining same-store sales, while the rest of the industry seems to be thriving. The company has also hired a new CEO, Steve Easterbrook, to guide its ship out of the choppy waters. As a recent development, McDonald's Corporation is going to test an all-day breakfast in selected outlets during the next month or two.
Johnson & Johnson hasn't decreased its dividends for 52 years and currently provides a dividend yield of 2.73%. Among the billionaires that we track, 10 had investments totaling $1.87 billion in the pharmaceutical company. Ken Fisher was one of them as his fund Fisher Asset Management held some 10.42 million shares valued at $1.09 billion. Johnson & Johnson is also one of hedge funds' favorite Dow stocks. The stock of Johnson & Johnson is up by nearly 4.29% over the last 52 weeks.
Our last candidate is Williams Companies, whose 4.73% dividend yield is also the highest on this list. Dividends have not been slashed for the past 12 years. The company's stock has achieved capital gains of nearly 23% over the last year. Keith Meister's Corvex Capital is a significant shareholder of the company with 41.68 million shares valued at $1.87 billion as of the end of 2014. Williams Partners L.P. (NYSE:WPZ), a Master Limited Partnership that was spun-off from Williams Companies, recently acquired Access Midstream Partners in a unit for unit share exchange at 0.86772 common units of Access Midstream worth one of Williams Companies' unit. The total value of the deal amounted to $50 billion.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.