Lorillard Inc. (LO), American Capital Agency Corp. (AGNC), Annaly Capital Management, Inc. (NLY): 5 Dividend Monsters Hedge Funds Love The Most

Several weeks after the end of each quarter, hedge funds and other major investors are required to file 13Fs with the SEC, disclosing many of their long equity holdings as of the end of the previous quarter. While the information in these filings is a bit old, there are a few ways to make use of it. For one, we have found that the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year, and we think that other strategies are possible as well.

We can also use our database to compile investor interest in individual stocks and pick out the most popular stocks in a number of categories. Here are the five most popular stocks which both have a market capitalization of at least $5 billion and which currently pay a dividend yield of at least 5%:

Top dog


Twenty-four filers in our database reported owning Lorillard Inc. (NYSE:LO), a $16 billion market cap cigarette company. In addition to high yields, cigarette companies are known for being defensive in nature and Lorillard Inc. (NYSE:LO) is no exception with a beta of 0.4. In addition, the stock is actually trading close to value levels even as investors have generally bid up high-yielding investments; the current valuation represents a trailing P/E of 14. Renaissance Technologies, whose founder Jim Simons is now a billionaire, increased its stake in Lorillard Inc. (NYSE:LO) during Q1 to a total of 4.5 million shares see Renaissance’s stock picks.

The best of the rest

Hedge funds also liked American Capital Agency Corp. (NASDAQ:AGNC), a real estate investment trust which primarily invests in mortgage-backed securities. Real estate investment trusts receive favorable tax treatment conditional on distributing a large share of taxable income to shareholders, which often results in high yields. American Capital Agency Corp. (NASDAQ:AGNC) has been making quarterly payments of $1.25 per share each of the last four quarters (though this is down a bit from what it was previously paying) and that makes for a dividend yield of over 15%. However, the nature of its business makes the company’s cash flows fairly risky.

Similarly, REIT Annaly Capital Management, Inc. (NYSE:NLY) has gotten a good deal of attention from hedge funds due to its dividend yield of 12%. It too is focused on investing in mortgage-backed securities, explaining why investors aren’t bidding up the stock by enough to reduce its yield. We’d note that Annaly Capital Management, Inc. (NYSE:NLY) has been reducing its quarterly dividend payments, and they are currently about two-thirds of what they were three years ago. Still, it’s possible that this monster-yielding REITs could be good complements to a dividend portfolio rooted in high quality blue chip stocks.

Our database showed 23 hedge funds and other notable investors with positions in CenturyLink, Inc. (NYSE:CTL), a telecommunications company. The quarterly dividend was recently cut to 54 cents per share, but this still leaves CenturyLink, Inc. (NYSE:CTL) paying a yield of just under 6% (though of course it’s possible that the dividend will decline further in the future). Earnings have been up, though revenue fell 25 last quarter compared to Q1 2012. Bridgewater Associates, a large hedge fund managed by billionaire Ray Dalio, initiated a position of about 470,000 shares during the first quarter of 2013; find Bridgewater’s favorite stocks.

Electric utility FirstEnergy Corp. (NYSE:FE) rounds out our list of hedge funds’ favorite stocks in this dividend category. The current dividend yield here is 5%, and like many other utilities FirstEnergy Corp. (NYSE:FE) has little exposure to the broader economy as shown by the beta of 0.3. We’d note that the stock price has fallen 8% in the last year, so investors who bought in a year ago are currently underwater even with the high yield. However, payments have been generally consistent at 55 cents per share each quarter since being increased to that level in February 2008.

Final thoughts

Dividend stocks are written about incessantly in the financial blogosphere. One way to parse down the gigantic collection of income-generating stocks out there, however, is to parse them by hedge fund interest. As discussed in this article, Lorillard Inc. (NYSE:LO), American Capital Agency Corp. (NASDAQ:AGNC), Annaly Capital Management, Inc. (NYSE:NLY), CenturyLink, Inc. (NYSE:CTL) and FirstEnergy Corp. (NYSE:FE) offer yields in excess of 5%, and investors don’t have to worry about liquidity, as each of these stocks sport market caps larger than $5 billion. This is inherently an exclusive club, but it’s absolutely essential to know which are most loved by the world’s biggest money managers and hedge funds; continue learning why here.

Disclosure: I own no shares of any stocks mentioned in this article.