We have found ten cheap dividends stocks that hedge funds were in love with during the third quarter. Dividends play a big role in total stock market returns, hence the reason we have a special appreciation for those stocks that have solid dividend yields—especially in our current low rate environment. In a span that covers the last 30 years leading up to 2012, the Wall Street Journal notes that dividend-paying stocks have returned an average of 8.9% annually, compared to 1.8% for non-dividend paying stocks.
To add to this notion, the dividend stocks we have found are also trading cheap relative to the market with P/E ratios less than 15x earnings. Each stock listed has a market cap of more than $30 billion, a dividend yield of at least 3% and more than 30 hedge funds (of the funds we track; see our full list here) holding ownership. We have ranked these stocks by the number of hedge funds reported to own these stocks at the end of the third quarter, from largest to smallest.
The most popular cheap dividend stock among hedge funds is Microsoft Corporation (NASDAQ:MSFT). There were 96 hedge funds with Microsoft positions at the end of September. The tech giant pays a dividend that yields 3.5% and trades at only 14.4x earnings. Microsoft is expected to see revenues up 8.5% in 2013 and then 7% in 2014. Driving this growth will be its Windows operating system, expected to see segment revenues up 18% in 2013. Microsoft trades in line with its major tech peers at just over 14x earnings, but is very cheap on a forward basis at 8x earnings. Microsoft is billionaire Jim Simons' top pick (check out all his top picks).
The second most popular dividend paying stock among hedge funds is Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX). Freeport saw 49 funds as owners at the end of 3Q, and pays a dividend yield of 3.2%. Its 12.6x P/E is below top competitor Southern Copper’s 16x mark, and its 8x forward P/E makes the mining company a solid value play in our opinion. Freeport is one of the world’s largest copper producers and is expected to grow revenues 30% in 2013 after a drop of 14% in 2012. Global economic strengthening should help drive 2013 revenue increases as copper prices are lifted on the back of increased copper demand.
BP PLC (NYSE:BP) is expected to continue its $45 billion asset sale and annual production growth of 1% over the next five years. BP had 44 funds as owners at the end of 3Q and also trades among the cheapest in its industry at 7.6x. After a brief suspension of its dividend, BP has paid a quarterly dividend since the beginning of 2011 and pays the highest dividend yield of our ten stocks at 5.2%. BP plans to modernize 50% of its U.S. downstream assets and sell the rest, while already boasting over $15 billion in cash at the end of the third quarter. BP is one of Seth Klarman's 3Q value plays; Klarman is the author of Margin of Safety and is the manager of one of the world's largest hedge funds, The Baupost Group (check out all his new value picks).