The Smart Money Is Bullish On These 5 Dividend Stocks

The latest 13-F filings are out, and hedge funds have increased their positions in five dividend stocks that each yield over 4%. Without further ado, let’s take a closer look at the consensus hedge fund dividend picks, including AT&T Inc. (NYSE:T), Exelon Corporation (NYSE:EXC), Entergy Corporation (NYSE:ETR), Las Vegas Sands Corp. (NYSE:LVS), and Joy Global Inc. (NYSE:JOY).

But why do 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 36 month period beginning from September 2012 (see the details here).

#5 Joy Global Inc. (NYSE:JOY)

Number of Hedge Fund Holders (as of September 30): 28
Total Value of Hedge Fund Holdings (as of September 30): $254.33 million
Hedge Fund Holdings as Percent of Float (as of September 30): 17.40%

Hedge funds are buying the dip in mining equipment producer Joy Global Inc. (NYSE:JOY), as the number of funds long the stock increased to 28 from 19 in the second quarter. Because Joy Global shares have declined by 70% year-to-date due to the carnage that low commodity prices have inflicted on mining equipment producers, JOY now yields an attractive 5.96% dividend and trades at 11 times forward earnings. Although the company missed earnings and revenue expectations in the third quarter, Joy Global is still profitable with management guidance of $1.80 in EPS for 2015. Analysts expect Joy Global to earn another $1.21 in EPS next year, more than enough to cover the company’s dividend of $0.80 per year. If commodity prices rebound, look for Joy Global to do well.

#4 Las Vegas Sands Corp. (NYSE:LVS)

Number of Hedge Fund Holders (as of September 30): 29
Total Value of Hedge Fund Holdings (as of September 30): $260.58 million
Hedge Fund Holdings as Percent of Float (as of September 30): 0.90%

Like Joy Global, Las Vegas Sands Corp. (NYSE:LVS) is yet another casualty of China’s slowing economy. Whereas Joy Global shares declined due to flagging Chinese commodity demand, Las Vegas Sands shares have fallen 22% year-to-date, because of the Chinese government’s crackdown on corruption, which has led to fewer high roller visitors to Las Vegas Sands’ Macau casinos. Because of the stock’s decline, Las Vegas Sands now yields an attractive dividend of 5.97% and trades at a reasonable forward P/E of 17. Although Las Vegas Sands’ recent string of dividend raises may be a thing of the past given the challenging macro-economic climate, the company’s dividend is covered at the moment and the smart money is optimistic. The number of funds long the stock increased to 29 from 19 during the third quarter

#3 Entergy Corporation (NYSE:ETR)

Number of Hedge Fund Holders (as of September 30): 29
Total Value of Hedge Fund Holdings (as of September 30): $683.7 million
Hedge Fund Holdings as Percent of Float (as of September 30): 5.80%

It’s been a difficult year for utility companies and Entergy Corporation (NYSE:ETR) is certainly no exception. Shares of the electric power producer and distributor have fallen by 23% year-to-date as investors begin cycling out of utilities given the normalizing Treasury yields. While investors have been bearish, the smart money has been increasingly optimistic in large part due to ETR’s durable cash flows and its dividend yield of over 5%. According to our extensive database of around 730 elite funds, 29 funds were long ETR, holding $683 million worth of shares at the end of September, up from 19 funds and $417.55 million at the end of June. Among the bullish hedge funds are Jim Simons’ Renaissance Technologies, with a holding of 2.47 million shares, and Cliff Asness’ AQR Capital Management, with a stake of 1.3 million shares.

#2 Exelon Corporation (NYSE:EXC)

Number of Hedge Fund Holders (as of September 30): 40
Total Value of Hedge Fund Holdings (as of September 30): $954.81 million
Hedge Fund Holdings as Percent of Float (as of September 30): 3.70%

As previously mentioned, it’s been a down year for most utility companies as big mutual funds rotate out of the sector due to normalizing yields. Although Exelon Corporation (NYSE:EXC) shares are down 23% year-to-date because of the Great Rotation, Exelon’s decline has made it an attractive dividend play. Shares now yield 4.57% and trade at a reasonable 10.6 times forward earnings. Seeing as the company’s payout ratio of 0.55, Exelon’s dividend is secure and has room to expand given the company’s predicted next five year average EPS growth rate of 5.03%. Hedge funds are certainly bullish as the number of elite funds long the stock jumped by 10 during the third quarter.

#1 AT&T Inc. (NYSE:T)

Number of Hedge Fund Holders (as of September 30): 60
Total Value of Hedge Fund Holdings (as of September 30): $3.76 billion
Hedge Fund Holdings as Percent of Float (as of September 30): 1.90%

AT&T Inc. (NYSE:T) is America’s second largest wireless carrier and a must-have for any dividend portfolio. With a dividend yield of 5.59%, a quarterly dividend of $0.47 a share, a payout ratio of 0.696, and a track record of 30 straight years of dividend increases, AT&T’s dividend is as secure and as attractive as any company’s on the market today. AT&T has been able to grow its dividend so consistently because the company has a wide moat. It takes a lot of capital to buy spectrum licenses from the government to operate and to build the infrastructure needed to offer competitive services that customers want. It also takes a lot of time for a new entrant to garner enough market-share to break even. Many wireless/broadband customers are locked into multi-year contracts that make it difficult to impossible for a new entrant to take until their contracts expire. AT&T Inc. (NYSE:T)’s dividend has increased by an average annualized rate of 2.3% over the past five years and could rise as fast as 5.85% a year over the next five years if management increases the dividend in line with the company’s expected average EPS growth rate. AT&T also has more than $2.5 billion of annual synergies from its DIRECTV acquisition that it hopes to unlock by 2018 that would increase the dividend further. Given AT&T Inc. (NYSE:T)’s favorable qualities, it’s not surprising that 60 elite funds were long the stock at the end of the third quarter, up from 49 funds long the stock at the end of June.

Disclosure: None