U.S. lawmakers are faced with the difficult task of sustaining an economic recovery while creating a viable deficit reduction strategy to position the country for the future. The resultant uncertainty of the present economic climate, as well as fears of an increase in capital gains and dividend income taxation entering the year, have added to the turbulence of the financial sector. In the last four years, financials have borne the brunt of the financial crisis, as well as bankruptcies, sizeable losses, government bailouts and resultant nationalization.
Even so, sector returns are up 20.94% over the past year, and the hedge funds we track aren’t shying away from quality, dividend-paying financials. With the market-beating returns that our premium strategies at Insider Monkey have generated in the past, it’s always important to track the smart money (learn which strategies have historically outpaced the broader indices).
Here are five S&P 500-traded stocks, with dividend yields of at least 3%, and market caps in excess of $10 billion that hedgies are smitten with. They are ranked by hedge fund consensus, in order of first to fifth.
Held by 31 of the funds we track, CME Group Inc (NASDAQ:CME) composes 9.36% of Alan Howard and Brevan Howard’s holdings. Clearly, Howard is bullish on the stock, as are Theleme Partners. With an industry outperforming ROE (4.17%) and a dividend yield of 3.12%, it’s not surprising CME is up 14% year-to-date.
Matt Frankel writes on the Motley Fool, “CME has flourished, with revenues rising every year over the past decade, even during the crazy years of 2008 and 2009, when every company even remotely related to financial services was getting crushed,” and it’s difficult to disagree with this analysis. Even more importantly, at least for income-oriented investors, CME Group Inc (NASDAQ:CME)s dividend payout is trending upwards, and obviously, it’s well positioned in the futures and options segment of the financial services industry. Indeed, CME recently announced that it declared a first-quarter dividend of $0.45 per share, payable March 25th.
Twenty-seven funds reported long positions in BB&T Corporation (NYSE:BBT), second on our list, with First Eagle Investment Management and D.E. Shaw owning the most shares. BB&T recently made headlines by taking over the 160th spot in the S&P 500, ordered by market capitalization.
The Winston-Salem, NC based company, who primarily conducts business through its commercial banking subsidiary, Branch Banking and Trust Company, has a current dividend yield of 3.08%. Additionally, with its 1,800 financial centers, BB&T has an excellent presence in several regions, including the Mid-Atlantic, South and Midwest—a level of coverage that limits the ill effects of lagging areas.
BB&T is clearly efficient and capable of turning minimal revenue into investor profit as demonstrated by its 10.51% ROE. Equally as crucial for bulls, the company is continuing to grow, displaying in excess of 37% year-over-year growth in the final quarter of last year.
Equity Residential (NYSE:EQR), meanwhile, comes in third with 21 funds taking a long position in the stock. With a market cap of $18 billion, the multi-family property development and management company has an impressive 5.37% dividend yield and has shown significant growth in both operating income and revenue. Operating income is up 23% and revenue has increased by 13% in the past year, making this stock a solid income investment with added potential for momentum-based appreciation going forward.
AvalonBay Communities Inc (NYSE:AVB) is tied for the third most popular high-dividend financial stock with 21 hedge funds holding long positions at the end of last quarter. Along with EQR, Jeffrey Furber’s AEW Capital Mangament is one of the most heavily invested hedge funds, with AVB occupying 5.3% of AEW’s holdings. The company is a REIT focused on developing, redeveloping and acquiring multi-family communities in markets with significant barriers to entry, such as the New England and New Jersey Metro areas. The stock has taken a pummeling in the past year, but is presently trading at solid ROI (2.71%) and ROE (4.72%) metrics, which outpace the industry by 0.23% and 0.41% respectively. AvalonBay also sports an attractive dividend yield of 3.32%.
Only 19 hedge funds are long on HCP, Inc. (NYSE:HCP), but the REIT has an excellent record of paying dividends and is up a staggering 27.86% over the past year.
What else is there to like about the company?
With a dividend yield of 4.32% and an ROE of 8.07%, it’s not hard to see why AEW Capital Management is heavily invested here too. The price-to-book for HCP, who invests in the healthcare industry using a variety of investment products, including debt instruments and properties under lease, is 2.05. Its industry’s average is almost 3% higher than this level, so there’s a slight value play here.
Additionally, the company comprises 3.54% of Welch Capital Partners’ holdings, with Jim Simons of Renaissance Technologies (see Simons’s favorite stock picks) and D.E. Shaw taking the third and fourth largest positions in the company of the funds we track.
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