How is the Smart Money Playing Mega-Dividend Stocks? – Merck & Co., Inc. (MRK), Intel Corporation (INTC), Verizon Communications Inc. (VZ)

Only 47 stocks in the S&P 500 currently pay a dividend yield in excess of four percentage points, and of this top decile, a little over half sport market capitalizations greater than $10 billion. This pool includes companies of all walks of life, from tech to utilities. The smart money is heavily invested in this space, and the 400-plus top-tier hedge funds we track have over $19 billion invested in the so-called “mega-dividend” club.

While the hedge fund industry as a whole has disappointed of late, we at Insider Monkey have proven that the best money managers—the Buffetts and the Einhorns, if you will—can beat the market consistently (here’s how they do it). The performance of the MarketWatch Insider Monkey Billionaire Hedge Fund Index, which outpaced the S&P 500 ETF by 8% last year, also supports this notion.

With this in mind, let’s take a look at the mega-dividend payers that have the greatest support from the smart money.

Merck & Co., Inc. (NYSE:MRK)

Merck & Co., Inc. (NYSE:MRK) is far and away hedge funds’ top pick of this group. At the end of the last full 13F filing period with the SEC, 53 funds held bullish positions in the global pharma giant, including Stanley Druckenmiller, Cliff Asness and Joel Greenblatt. Merck currently pays a dividend yield of 4.1%, and shares have risen by more than 9% over the past 12 months.

The company was a winner in its latest earnings report, though some investors have been turned off by its decision to delay filing for FDA approval of its osteoporosis drug Odanacatib until 2014. Still, at 10.9 times forward earnings, Merck trades at a discount to Pfizer and Johnson & Johnson.

Next up we have Intel Corporation (NASDAQ:INTC), which has support from 44 of the 400 or so hedge funds we track. With a dividend payout yielding more than 4.2%, Intel is in rare territory as a tech stock. It’s one of only five large-cap companies in this sector to yield above this mark, and it is the best value of the bunch at a PEG ratio of 0.84. Value and income-oriented investors can both take solace in the fact that Ken Fisher (see his full portfolio) and Jim Simons are two of Intel’s biggest bulls.

Verizon Communications Inc. (NYSE:VZ) sits at third among hedge funds’ favorite mega-dividend stocks. One would naturally be inclined to think that because Verizon pays a dividend yield of 4.6%—far greater than Merck and Intel—hedgies would prefer the telecom company, aggregately speaking. With 39 funds invested, though, this is obviously not the case. One look at Verizon’s earnings history may explain why; it has missed Wall Street’s EPS estimates in two of the past five quarters, while experiencing a positive surprise just once over this time.

Still, the telecom’s 4G LTE system offers dominant nationwide coverage over AT&T, and shares of Verizon trade at a 30% discount to their key competitor on a price-to-sales basis.

Who’s the best of the rest?

ConocoPhillips (NYSE:COP) is next on our list, and it is the only S&P 500-listed company operating in the major integrated oil & gas industry to pay a dividend yield of at least 4%. ConocoPhillips spun off Phillips 66 [s:PSX], its downstream segment, last spring, and COP shares have returned 1.9% since this split hit the markets. Phillips 66 has nearly doubled over this same time period. Still, Wall Street analysts’ average price target predicts a 6% upside on ConocoPhillips from current levels, and it’s difficult to ignore the company’s massive 4.6% dividend yield.

Last but certainly not least, Lockheed Martin Corporation (NYSE:LMT) and Altria Group, Inc. (NYSE:MO) sit at a two-way tie for fifth among hedgies’ favorite mega-dividend stocks. Both companies pay dividends that yield greater than 5%, though Lockheed Martin has underperformed Altria by a whopping 15.7% in 2013 thus far.

On the whole, shares of the defense contractor are down more than 5% under the weight of Mr. Market’s fears concerning U.S. defense cuts over the foreseeable future. Lockheed Martin’s latest fourth quarter financials indicated that declines in the IT space and fewer F-22 orders were partially counterbalanced by bullish demand for F-35 and F-16 fighters, but the company still missed the Street’s EPS forecast by 5%. Income-seeking investors interested in Lockheed Martin should continue to monitor the defense industry’s uncertain macroeconomic outlook.

Altria, meanwhile, has performed very well year-to-date, and reported a generally strong fourth quarter in which cigarette volume grew by 0.4% in the face of an industry wide decline of close to 3%. The tobacco company has now beaten analysts’ bottom line estimates in three of the past five quarters, and at 13.5 times forward earnings, shares are a steal compared to the likes of Philip Morris, Reynolds American and British American Tobacco.

While there are many dividend-paying stocks in the marketplace today, the six described above shed light on how the best hedge funds are investing in this space. With results like this, retail investors should always consider the smart money’s sentiment before making an investment decision.

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