10 Blue Chip Dividend Stocks Hedge Funds Are Buying

In this article, we presented the 10 blue-chip dividend stocks hedge funds are buying.

2020 was one of the worst years for dividend and dividend growth stocks as pandemic and economic meltdown have strongly impacted cash flow generation of dividend-paying companies. Down Jones US Select Dividend Index, which tracks the performance of dividend-paying companies in the Dow Jones U.S. Index, fell almost 5% in 2020 compared to more than 16% gains from the broader market index. Other dividend indices including Down Jones US Select 100 Dividend index and S&P 500 Dividend Aristocrats have also underperformed in the last twelve months compared to the S&P 500 index.

This marks the first underperformance of dividend indices in the past three largest bear markets. The bear markets include coronavirus selloff in 2020, the tech bust, and the global financial crisis in 2008. In the 2000 and 2008 bear markets, dividend indices have outperformed the broader market index but underperformed in 2020.

Dividend indices fell along with other indices at the beginning of 2020. Unfortunately, dividend stocks failed to bounce back during the second quarter when indices saw a massive recovery. However, dividend indices have performed well during the final quarter when investors moved the focus from tech growth stocks to value and dividend stocks. The technology sector accounted for the biggest returns of the S&P 500 in 2020, but the sector has low weighting when it comes to dividends.

The pandemic year is over now and investors have started finding better value and dividend stocks as these companies are likely to catch up with the pent-up demand on economic reopening. Tech, internet, and consumer discretionary stocks underperformed since the beginning of 2021 while the highest dividend-paying sectors like Financials, Energy, Healthcare, Industrials, and Utilities are bouncing back.

What’s more, the common dividend increases stood around $13.9 billion in the fourth quarter, according to SPGlobal.com. This represents a strong rebound compared to common dividend increases of $8.4 billion in the third quarter and $6.7 billion in the second quarter. Moreover, the net indicated dividend rate change grew $9.5 billion in Q4 compared to a negative $2.3 billion in Q3 and a drop of $42 billion in the second quarter.

Despite the latest increase, the net dividend rate fell $40.5 billion in 2020 compared to a growth of $45.4 billion for 2019.

“Many companies have stabilized their operations and sales and are returning cash flow to the dividend market,” said Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indices. Silverblatt continued, “ some issues which had suspended their payments after the start of COVID, have resumed payments. The $13.9 billion in Q4 increases represented a 15.7% increase over the pre-COVID Q4 2019 period. For the year, the $82.2 billion in cuts and suspensions took their toll but now appear to have mostly abated as increases of $41.4 billion helped limit the damage. Looking ahead to 2021, absent a failure on the COVID treatment side, dividends should be impressive with the S&P 500 expected to post a new record payment.”

Considering the optimistic outlook for dividend payments, we decided to present the 10 blue-chip dividend stocks hedge funds are buying. For that, I identified the Dow Jones Constituents that yield at least 2.5% as of today and sorted them by hedge fund popularity. We use hedge popularity to rank stocks because our research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 88 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Here are the top 10blue chip dividend stocks hedge funds are buying:

10. Chevron Corporation (NYSE: CVX)

The oil and gas giant Chevron Corporation (NYSE: CVX) is one of the favorite dividend stocks of hedge funds amid its long dividend history and ability to sustain dividends even in the historic down cycles. The company has raised dividends in the past 33 straight years.

CVX has sustained its dividend growth even in 2020 when several other players were seeking to avoid bankruptcies and struggling for their own survival. Oil traded in a negative range during the second quarter and the entire energy sector posted a loss of more than 40% for the full year.

Chevron is among the highest-yielding component of the Dow Jones Index, which tracks the performance of the 30 largest US-listed companies. The company currently offers a quarterly dividend of $1.29 per share, yielding around 5.41%. It was in 43 hedge fund portfolios at the end of the September quarter and ranked tenth most favorite dividend stock among hedge funds.

Diamond Hill Capital highlighted few stocks including Chevron Corporation in an investor’s letter. Here is what Diamond Hill Capital stated:

“Integrated oil and gas company Chevron Corp. shares meaningfully declined during the quarter as OPEC+ failed to reach a deal, allowing us to establish a position in this lower risk, more diversified company at a sufficient discount to our estimate of intrinsic value.”

9. Amgen Inc. (NASDAQ: AMGN)

Biotechnology firm Amgen Inc. (NASDAQ: AMGN) was in 45 hedge fund portfolios and it is the ninth most favorite dividend stock among hedge funds.

Amgen has raised dividends in the past nine successive years, thanks to its strong cash-generating potential. Its five-year average dividend growth rate stands around 15%. The company currently offers a quarterly dividend of $1.76 per share, yielding around 2.79%. Its dividends are safe because of its robust financial numbers. The company has generated 12% year-over-year revenue growth in the latest quarter while its non-GAAP earnings per share grew 19.4% from the year-ago period.

8. 3M Company (NYSE: MMM)

The diversified industrial giant 3M Company (NYSE: MMM) has been considered as one of the best stocks for the dividend portfolio because of its extensive dividend growth history and stable business model. It is the eighth-most favorite dividend stock among the hedge funds and it was in 56 hedge funds’ portfolios at the end of the September quarter.

It has raised dividends in the past 62 consecutive years and paid uninterrupted dividends in the last 100 years. During the last decade, the company has returned $57 billion through a combination of dividends and gross share repurchases. Its free cash flows are offering room for more dividend increases. For instance, the company has generated $2.2 billion in free cash flows in the September quarter compared to dividend payments of only $847 million.

7. Cisco Systems, Inc. (NASDAQ: CSCO)

Hedge funds like to hold a position in Cisco (NASDAQ: CSCO) amid its strong dividends and steady share price upside potential. It was in 59 hedge fund portfolios at the end of the September quarter. The company has raised dividends in the past nine successive years and it is currently offering a quarterly dividend of $0.36 per share.

Heartland Opportunistic Value Fund, which returned 3.1% for the third quarter, highlighted strong confidence in its dividends and lower valuations. Here’s what Heartland Opportunistic Value Fund stated:

“A handful of Information Technology (IT) names have been grabbing most of the investment headlines lately, however, as a whole, the sector has been a mixed bag from a performance standpoint. The Russel 3000® Value Index highlights the dynamic where the group ended the period mostly flat. Our holdings in the space outperformed marginally but also contained a key detractor, Cisco Systems, Inc. (CSCO).

Cisco, the world’s leading computer networking provider, was down for the period after revenues from its Products and Applications business lines weakened as IT departments postponed network spending in response to COVID-19. Sales from its security line were up roughly 14% but strength in the segment wasn’t large enough to offset weakness elsewhere. Impressively, they held operating margin on a 9% revenue decline.

Wall Street’s reaction to the weak results were mixed. Some credited the company for executing well in the face of an unprecedented macro pressure on its clients, while others cited results as an indicator that Cisco is struggling in its transformation from a predominantly hardware-oriented business to one that generates recurring-revenue through software and services. The challenges faced by Cisco strike us as a temporary setback to what has been ongoing progress in its transition to a model that generates recurring revenue and is less tied to the IT spending cycle. We believe the positive strides made in previous quarters will resume. With the recent setback, shares are trading at an attractive 12x earnings, while generating a nearly 4% dividend yield and a free cash flow/enterprise yield of nearly 10%.”

6. The Coca-Cola Company (NYSE: KO)

Consumer Staples giant The Coca-Cola Company (NYSE: KO) has always been considered the safest stock for a dividend portfolio.

The company has raised dividends in the past 58 straight years and it currently offers a quarterly dividend of $0.41 per share. KO was in 60 hedge fund portfolios at the end of the September quarter. The company has returned $6.8 billion in dividends in 2019, bringing the total amount given back in the form of dividends to $54.9 billion since 2010. The company is working on portfolio optimization, disciplined innovation, increased marketing effectiveness to enhance its financial numbers and dividends.

5. McDonald’s Corporation (NYSE: MCD)

Fast Food chain McDonald’s Corporation was in 65 hedge fund portfolios at the end of the September quarter. Hedge funds are buying McDonald’s amid its dividend growth potential along with prospects for steady share price gain.

McDonald’s Corporation has raised dividends in the past 19 consecutive years and its average dividend growth rate stood around 8%. The company currently offers a quarterly dividend of $1.29 per share, which is equivalent to $5.16 annually. The strong business model and brand recognition have been helping in generating robust financial numbers. Its third-quarter comparable sales fell 2% year over year despite lockdowns and social distancing policies.

“Our third-quarter performance demonstrates the underlying resilience of the McDonald’s (MCD) brand. Our unique strengths, including our unrivaled drive-thru presence around the world, advanced delivery and digital capabilities, and marketing scale have become even more important during the pandemic. Our prior investments in these areas position us to further our competitive advantage and enable restaurant crew to continue to safely provide customers our great tasting food,” said McDonald’s President and Chief Executive Officer Chris Kempczinski.

4. Verizon Communications (NYSE: VZ)

Communication services company Verizon Communications (NYSE: VZ) is also considered the safest stock for dividend investors and it was in 65 hedge fund portfolios at the end of the September quarter. Verizon has increased its dividend every year over the past 14 years. It currently offers a quarterly dividend of $0.63 per share. The company returned almost $5.1 billion in cash dividend payments in the first half of 2020.

Its dividends are safe because financial numbers are offering complete cover to dividend payments. Its payout ratio based on income stands around 50%, meaning the company is returning only 50% of income to investors in the form of dividends. Here is what Mott Capital said about Verizon in a recent investor letter:

“Verizon (VZ) rose by 1.7% in the fourth quarter and by 9.2% for the year. Verizon is another company that should benefit as wireless subscribers upgrade their data plans from 4G to 5G. Additionally, the roll-out of 5G and the technology changes that it is likely to usher in will make having wireless data connections in the future more important than today. Again, Verizon appears to be a critical player in 5G and will continue to hold a place in the portfolio.”

3. Merck & Co.  (NYSE: MRK)

The pharmaceutical company Merck & Co.  (NYSE: MRK) has extensive dividend growth history and it is the third most favorite blue chip dividend stock among hedge funds.

It was in 80 hedge fund portfolios at the end of the September quarter. Its average dividend growth rate stands around 6.5% in the past five years. The company currently offers a quarterly dividend of $0.65 per share.

Its potential to generate sustainable growth in financial numbers has been supporting dividend growth. The company is returning only 43% of its income to shareholders in the form of dividends.

2. Johnson & Johnson (NYSE: JNJ)

Johnson & Johnson (NYSE: JNJ) is considered a defensive sock because of its 58 straight years of dividend growth. It is the second-best dividend stock hedge funds are buying.

It was in 82 hedge fund portfolios at the end of the September quarter. The dividends are fully backed by financial numbers. Its top and bottom-line growth are helping in raising dividends year over year. Its dividend payout ratio based on income stands around 50% while free cash flows are also offering a complete cover to dividend payments.

Johnson & Johnson is almost done with collecting data from the late stage trial of its COVID-19 single-dose vaccine candidate. The trial has 45,000 individuals enrolled and data from the process is expected by the end of January or early February.  If the study shows the vaccine is effective and safe, the company plans to submit an emergency use authorization application to the U.S. Food and Drug Administration in February.

1. JPMorgan Chase & Co (NYSE: JPM)

The banking giant JPMorgan Chase & Co is the most favorite dividend stock among hedge funds as it was in 118 hedge funds portfolio at the end of the September quarter. The company has sustained its dividend in the pandemic year. The company currently offers a quarterly dividend of $0.90 per share.

JPM is among the few banks that have generated positive revenue growth in the September quarter while earnings per share of $3.79 topped analyst’s expectations by $1.17 per share. The strong revenue and earnings are the outcome of its diversified business model. The bank has strong confidence in its cash generation potential because it recently announced a $30 billion share buyback plan.

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