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Billionaire Steven Cohen’s Top High Dividend Stock Picks and Ones He Bets Against

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.

Steve Cohen SAC CAPITAL ADVISORS

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.

Cohen likewise made a big move into another high yield energy company, Noble Corp plc (NYSE:NE), which is his next top high dividend pick. The position is in fact a new one in Cohen’s equity portfolio and consists of 3.53 million shares valued at $58.54 million. That ranked him as the second largest shareholder among funds we track, topped only by Firefly Value Partners, which increased their own stake by 50% during the fourth quarter to 3.70 million shares. Noble Corp plc (NYSE:NE) also checked in as the most lucrative dividend stock among Cohen’s top 100 stocks, with a yield of 10.45%. With shares having fallen by more than 55% over the past calendar year, and the dividend payout remaining unchanged during that time at $0.38, the company’s yield has more than doubled from 4.92%. Large integrated oil companies usually have low payout ratios and rarely cut their dividends, so they are good choices for dividend investors. It will be interesting to see if this is the case with Noble Corp plc (NYSE:NE), should the company’s value continue to languish.

Before we move on to Cohen’s final high dividend pick, let’s take a look at a couple of high dividend stocks in the same industry that he did not pick; in fact, he’s betting against them, opening new ‘Put’ positions in both Chevron Corporation (NYSE:CVX) and ConocoPhillips (NYSE:COP) during the fourth quarter, each of which also sports a yield north of 4%. However, Cohen is not alone on this front, as fellow billionaire Paul Singer is also betting against both companies. Like Cohen, Singer is not completely bearish against the entire energy sector, making bullish bets on Hess Corp. (NYSE:HES) and Anadarko Petroleum Corporation (NYSE:APC). Cohen also has long positions in both of those companies, whose yields are much lower than their peers, at less than 1.5%. Given that, both Chevron Corporation (NYSE:CVX) and ConocoPhillips (NYSE:COP) appear to be less than ideal high dividend picks, which may end up losing value, which might result in big losses for investors. However, not all funds are bearish on Chevron Corporation (NYSE:CVX) and ConocoPhillips (NYSE:COP). Jean-Marie Eveillard’s First Eagle Investment has a long position in ConocoPhillips of 8.97 million shares, up by 16% during the fourth quarter, while Donald Yacktman’s Yacktman Asset Management holds 6.02 million shares. Billionaire Ken Fisher is the largest investor in Chevron among funds we track, with 3.44 million shares, while Phill Gross and Rovert Atchinson’s Adage Capital Management holds 2.37 million shares as of the end of 2014.

AstraZeneca plc (ADR) (NYSE:AZN) is Cohen’s third dividend pick boasting a yield of 4%. AstraZeneca plc (ADR) (NYSE:AZN) boasts a rather unique dividend payment structure in which it pays out twice annually as opposed to quarterly, and in with the first of the two annual dividend payments is considerably higher than the second (usually slightly more than double the amount). Cohen holds 587,400 shares in the $88.56 billion market-cap biopharmaceutical company as of the end of 2014, a slight decrease of 4% during the quarter. Arrowstreet Capital holds the largest position at 4.55 million shares, while the quantitative fund Renaissance Technologies, led by billionaire Jim Simons, owns 2.29 million shares.

Disclosure: None