With the rate hike from the Fed still far from a reality, there aren’t a lot of satisfactory fixed-income opportunities for retail investors out there. Investing in dividend stocks can be tricky too, as the companies offering extremely high yields come with greater risks, which could result in a cratering stock price, or those yields being dramatically slashed, or a combination of both. In order to minimize this risk we decided to look at the high-yield companies, which have earned the trust of more hedge funds that we track than other similar stocks. We have organized the list by their popularity among the professional money managers we track.
Why do we pay attention to hedge fund sentiment? Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research have shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return 118% over the last 35 months and outperformed the S&P 500 Index by 60.4 percentage points (see the details here).
5. Vale SA (ADR) (NYSE:VALE)
Investors with Long Positions (as of June 30): 22
Aggregate Value of Investors’ Holdings (as of June 30): $303.46 Million
Although the total number of funds with investments in Vale SA (ADR) (NYSE:VALE) decreased slightly from 23 at the end of March, the total investments surged from $242.56 million. The stock price rose by a little over 11% during this period as compared to the 25% increase in investment. Vale SA (ADR) (NYSE:VALE) decreased its semi-annual dividend to about $0.19, less than half of what it paid out in 2014. Nonetheless, the dividend yield of the stock has soared to 7.91% as shares of the company have crumbled, losing 63.76% over the past year. Richard Gerson and Navroz D. Udwadia’s Falcon Edge Capital is the largest stockholder of Vale SA (ADR) (NYSE:VALE) within our database, holding some 17.48 million shares.
4. Banco Santander, S.A. (ADR) (NYSE:SAN)
Investors with Long Positions (as of June 30): 23
Aggregate Value of Investors’ Holdings (as of June 30): $153.74 Million
The $87.73 billion Spain-based bank holding company offers a dividend yield of 3.53%. Banco Santander also slashed its dividend recently, by slightly over $0.11 quarterly, as its own stock has sank by over 36% in the past year. At the end of the first quarter only 16 funds had a total investment of $153.74 million in Banco Santander, S.A. (ADR) (NYSE:SAN). John W. Rogers‘ Ariel Investments and Howard Marks‘ Oaktree Capital Management are two prominent funds that were bullish on Banco Santander, S.A. (ADR) (NYSE:SAN) during the June quarter, raising their respective holdings by 8% and 116% to 1.06 million shares and 882,800 shares respectively.
3. PennyMac Mortgage Investment Trust (NYSE:PMT)
Investors with Long Positions (as of June 30): 23
Aggregate Value of Investors’ Holdings (as of June 30): $193.97 Million
At the end of March only 19 firms had positions in PennyMac Mortgage Investment Trust (NYSE:PMT), but the aggregate amount stood at $287.09 million. An almost 16% slump in the REIT’s stock price during the second quarter is partly attributable to the dip, but that could be about to change as PennyMac Mortgage Investment Trust (NYSE:PMT) recently announced plans to buy back up to $150 million of its stock. Since the $1.12 billion company primarily invests in distressed mortgages, it uses much less leverage than its counterparts in the industry. The current dividend yield stands at a towering 15.86%. Omega Advisors, which is led by Leon Cooperman is the largest stockholder of PennyMac Mortgage Investment Trust (NYSE:PMT) among the funds that we track, holding 2.60 million shares.
2. New Residential Investment Corp (NYSE:NRZ)
Investors with Long Positions (as of June 30): 38
Aggregate Value of Investors’ Holdings (as of June 30): $892.15 Million
Another REIT on the list that experienced a surge in interest during the second quarter is New Residential Investment Corp (NYSE:NRZ), as only 26 hedge funds had invested $257.91 million in the company at the end of the first quarter. New Residential Investment Corp (NYSE:NRZ)’s stock price is up by more than 10% so far this year and the current yield is about 12.65%. In its financial results for the second quarter, New Residential Investment Corp (NYSE:NRZ) reported an EPS of $0.45 as compared to $0.50 for the same quarter a year earlier. Revenues of $96.31 million, however, marked an increase of 71.6% over the same period. EJF Capital is at the top our list of hedge funds holding New Residential Investment Corp (NYSE:NRZ) in their portfolios, as it owns some 9.22 million shares valued at $140.46 million.
1. Northstar Realty Finance Corp( NYSE:NRF)
Investors with Long Positions (as of June 30): 64
Aggregate Value of Investors’ Holdings (as of June 30): $1.93 Billion
Not surprisingly, the first spot on this list of high dividend stocks is occupied by an REIT as well. The popularity of Northstar Realty Finance Corp( NYSE:NRF) has, however, slid from 72 funds with an aggregate investment of $2.47 billion at the end of the first quarter. Although the dividend yield of 11.20% is an extremely attractive feature of the stock, it should be borne in mind that the stock price has taken a hit of more than 18% so far this year. Northstar Realty Finance Corp (NYSE:NRF) reported a net loss per share of $0.28 on top of $487.55 million in quarterly revenue, which marked a 308.5% increase on a year-over-year basis. The company made strategic investments in Europe, which its management feels investors are attaching a much lower multiple to than their actual worth. Hence, Northstar Realty Finance Corp (NYSE:NRF) is still on track for its planned spin-off of NorthStar Realty Europe in the coming months. Christian Leone‘s Luxor Capital Group upped its stake in Northstar Realty Finance Corp (NYSE:NRF) by 38% during the second quarter to 18.07 million shares valued at $287.31 million.
Disclosure: None
