Nothing makes the day of a fixed income investor the way that finding a reasonably-priced, ultra-high dividend stock does. Since most large-cap and mid-cap stocks that pay notable dividends and have a consistent dividend payout history usually trade at a premium, it becomes immensely difficult for fixed income investors to select the right stocks for their portfolio. We at Insider Monkey understand this fact and also that for a fixed income investor, stability is a big priority, and this often compels them to steer clear of small-cap stocks. That’s why we decided to compile a list of 10 ultra-high dividend small-cap stocks that are backed by several hedge funds among the over 730 that we cover. Though no-one can predict how volatile a small-cap stock is going to be in the future, if that stock is backed by several top institutional investors, one can rest assured that such investors have strong conviction in the viability of the stock. The small-cap stocks that have made it onto our list this time around boast a minimum annual dividend yield of 10% and were owned by at least 14 hedge funds in our database as of the end of September. Be sure to check out part 2 of this two-part feature, with five more ultra-high dividend small-cap stocks you won’t want to miss.
But before we proceed to the list, let’s first understand why we track hedge fund activity. From one point of view we can argue that hedge funds are consistently underperforming when it comes to net returns over the last three years, when compared to the S&P 500. But that doesn’t mean that we should completely neglect their activity. There are various reasons behind the low hedge fund returns. Our research indicated that hedge funds’ long positions actually beat the market. In our back-tests covering the 1999-2012 period hedge funds’ top small-cap stocks edged the S&P 500 index by double digits annually. The 15 most popular small-cap stock picks among hedge funds also bested passive index funds by around 53 percentage points over the 38-month period beginning from September 2012, returning 102% (read the details here).
Apollo Investment Corp. (NASDAQ:AINV)
– Elite Investors with Long Positions (as of September 30): 17
– Aggregate Value of Elite Investors’ Holdings (as of September 30): $23.5 million
Let’s start with investment management company Apollo Investment Corp. (NASDAQ:AINV), which saw its stock lose 20% during the third quarter. Despite that drop, the popularity of the company among hedge funds actually increased during that period, with one additional fund reporting a stake in the company by the end of September. The stock did manage to recover in the fourth quarter, but has again slumped heavily in the last few days and currently trades with a year-to-date loss of almost 27%. On November 6, analysts at RBC Capital reiterated their ‘Outperform’ rating on the stock, but lowered their price target on it to $8 from $9. D E Shaw, founded by billionaire David E. Shaw, became heavily bullish on Apollo Investment Corp. (NASDAQ:AINV) during the third quarter, as it more than doubled its stake in the company to 153,217 shares during that period. Apollo Investment’s annual dividend yield currently sits at 14.73%.
Nordic American Tanker Ltd (NYSE:NAT)
– Elite Investors with Long Positions (as of September 30): 18
– Aggregate Value of Elite Investors’ Holdings (as of September 30): $80.35 million
Despite the slump in oil prices this year, Nordic American Tanker Ltd (NYSE:NAT) is among the few oil-related stocks that has outperformed the broader market spectacularly. Though the rally that Nordic American Tanker Ltd (NYSE:NAT)’s stock underwent has fizzled out a little in the past few weeks, it’s still trading up by over 40% year-to-date. During the third quarter, when the stock was up by almost 10%, the number of hedge funds tracked by us that were long the company increased by two. However, the aggregate value of investors’ holdings in the company declined by 33%, suggesting some profit-taking. Even after such a significant rise in its stock, the $0.38 per share quarterly dividend that the company pays still translates into an attractive annual dividend yield of 10.64%. Paul Marshall and Ian Wace‘s Marshall Wace LLP was one of the hedge funds that initiated a stake in the company during the third quarter; it held 336,921 shares of Nordic American Tanker Ltd as of September 30.
Two Harbors Investment Corp (NYSE:TWO)
– Elite Investors with Long Positions (as of September 30): 19
– Aggregate Value of Elite Investors’ Holdings (as of September 30): $136.4 million
Shares of Two Harbors Investment Corp (NYSE:TWO) have undergone a gradual decline since June, which has caused them to now trade down by nearly 20% year-to-date. This decline has made the $0.26 per share quarterly dividend paid by the REIT highly lucrative, translating into an annual dividend yield of almost 13%. Hedge funds that owned the stock largely held on to their conviction for it during the third quarter, with the number of funds reporting a stake in the REIT declining by one during the period. On December 3, analysts at JPMorgan Chase & Co. reiterated their ‘Outperform’ rating on Two Harbors Investment Corp (NYSE:TWO), while at the same time lowering their price target on it to $11 from $12. Billionaire Israel Englander’s Millennium Management continued to remain the largest shareholder of Two Harbors Investment Corp in our database at the end of September, even after reducing its stake in the REIT by 11% during the third quarter, to 3.54 million shares.
New Residential Investment Corp (NYSE:NRZ)
– Elite Investors with Long Positions (as of September 30): 33
– Aggregate Value of Elite Investors’ Holdings (as of September 30): $674.4 million
Moving on, New Residential Investment Corp (NYSE:NRZ) is another REIT whose shares have suffered a gradual decline since June. However, because of their strong start to the year, they are currently trading down by only 13.5% year-to-date. The 14% decline that New Residential Investment Corp (NYSE:NRZ)’s stock suffered during the third quarter did cause its popularity among hedge funds to go down a bit, as there were 38 funds that reported owning a stake in the REIT as of the end of June. Nevertheless, the 33 funds that owned a stake in it at the end of September still owned 22.30% of the outstanding shares of the REIT. We believe that New Residential Investment Corp is one of the best small-cap stocks to buy at these levels, not only because it boasts an annual dividend yield of 16.66%, but also because it is trading at a forward price-to-earnings multiple of only 5.82 and price-to-book multiple of just 0.96. Anand Parekh‘s Alyeska Investment Group was among the hedge funds that increased its stake in New Residential Investment Corp substantially during the third quarter, by 20%; it held over 5.7 million shares of the REIT on September 30.
Northstar Realty Finance Corp (NYSE:NRF)
– Elite Investors with Long Positions (as of September 30): 59
– Aggregate Value of Elite Investors’ Holdings (as of September 30): $1.53 Billion
With a quarterly dividend payout of $0.75 per share, which amounts to an annual dividend yield of 18.27%, commercial real estate company Northstar Realty Finance Corp is the numero uno ultra-high dividend small-cap stock that you should definitely know about. On November 2, the company announced the completion of the spin-off of NRE, its European real estate business, and also the exercising of its one-for-two reverse stock split. Prior to this, the stock of Northstar Realty Finance Corp (NYSE:NRF) endured a turbulent third quarter, losing 20%. This underperformance during the third quarter also weighed on the stock’s popularity during that time, with five fewer elite funds reporting a stake in it as of the end of September than did at the end of June. Having increased its stake in Northstar Realty Finance Corp by 12% to over 19 million shares, Robert Pitts‘ Steadfast Capital Management emerged as its largest shareholder at the end of September among funds that we cover.