Investment professionals usually recommend a balanced portfolio of stocks and bonds, something like 60% stocks and 40% bonds. They also recommend that investors should increase their bond allocations as they get older. This is usually a sound idea, but we aren’t living in usual times anymore. Central banks have been artificially reducing the yields on both short-term and long-term bonds. The 30-year US Treasury bonds yield 2.55% and that’s before inflation. Inflation usually runs between 2% to 3% annually, which means long-term bond investors are getting real returns of close to zero. Long-term bond yields may decline in the short-term and bond investors may enjoy strong short-term capital gains, but we don’t think bonds are good long-term capital allocation alternatives for investors near their retirement ages looking to grow their nest eggs.
We think dividend stocks are better alternatives than bonds as they will more likely be able to increase their payouts over the next 30 years. An investor who buys shares of a dividend stock that yields 4% today will probably enjoy much higher payoff in average annual returns over the next 30 years, whereas the average annual return of the 30-year Treasury bond will be 2.55% over the next 30 years.
In this article we will focus on the top three high dividend picks of billionaire Steve Cohen of Point72 Asset Management. These are Royal Dutch Shell plc (ADR) (NYSE:RDS.A), Noble Corp plc (NYSE:NE), and AstraZeneca plc (ADR) (NYSE:AZN), as of the end of 2014. You probably know that hedge funds usually don’t invest in dividend stocks solely for their yields. They think these stocks are undervalued and will probably deliver strong capital gains over the next few years. By investing in these companies, you can get a steady cash flow from a dividend yield of at least 4% and can still profit from the long-term growth of your capital.
Dividend payments are one of the bonuses inherent in investing long-term in many large-cap companies, though these companies are otherwise unlikely to generate the same kind of returns for investors as small-cap companies can. This is exemplified by our research into the returns of hedge funds’ top small-cap picks compared to their top large-cap picks. The top small-cap picks greatly outperformed their larger peers and the broader market, returning 132% in forward testing from the end of August 2012 through March 11, 2015, compared to returns of 52.6% generated by the S&P 500 (SPY) during the same period (read more details here).
Cohen’s top high dividend pick is Royal Dutch Shell plc (ADR) (NYSE:RDS.A), which currently sports an annual dividend yield of 6.21% based on a $0.94 quarterly payout to shareholders of record, which it has maintained for the past four quarters. Royal Dutch Shell plc (ADR) (NYSE:RDS.A)’s yield has steadily improved over the past few years as its dividend payments have increased by more than 10% since early 2012, while shares of the giant oil and gas company have actually decreased by more than 15% over the same period. Cohen made a huge move into Royal Dutch Shell plc (ADR) (NYSE:RDS.A) during the fourth quarter, increasing his position to 1.52 million shares valued at $101.95 million from only 12,000 held previously. That elevated him to being the fourth-largest shareholder among the funds we track, with Pzena Investment Management and Highfields Capital Management also owning substantial positions.