A Look at Performance of Hedge Funds’ Five High-Dividend Bets

Income stocks definitely need to account for a large share of one’s retirement portfolio, as most income stocks are usually associated with lower levels of volatility than the broader market. Indeed, the young generation of investors has both the time and appropriate wages to cover any possible (sizable) losses in equity markets (assuming that this camp of investors opts for growth stocks instead of income stocks), but retirees need stable income more than anything else. An ideal equity portfolio for retirees would generally comprise a diversified basket of strong companies that pay attractive dividends. Given the current low interest-rate environment across the globe, which means that investors continue to receive low returns from bank deposits or other debt-related instruments, dividend stocks may continue to receive high attention from the investment community. But is there anything better than a mix of strong capital appreciation and high dividend payments? So my simple answer to this question would be: Nothing. For that reason, Insider Monkey decided to lay out a list of high-dividend stocks and discuss their performance in the first quarter of this year.

At Insider Monkey, we track around 730 hedge funds and institutional investors. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see more details about our small-cap strategy).

Northstar Realty Finance Corp (NYSE:NRF)

– Elite Investors with Long Positions (as of December 31): 48

– Aggregate Value of Elite Investors’ Holdings (as of December 31): $796.16 Million

– Dividend yield: 12.82%

Like most dividend-paying companies, Northstar Realty Finance Corp (NYSE:NRF) lost some attractiveness within the hedge fund industry during the final quarter of 2015. Specifically, the number of funds tracked by Insider Monkey with stakes in the company declined to 48 from 59 quarter-on-quarter, with those 48 funds amassing almost 25% of its total number of outstanding shares on December 31. Northstar Realty Finance is a diversified commercial real estate company that invests in multiple asset classes such as healthcare, hotel, manufactured housing communities, net lease and multifamily properties. Although the company pays out an eye-catching dividend of 12.82%, some analysts believe that a possible investment in this company’s shares represents an extremely risky investment alternative that should be avoided. One thing is crystal clear, Northstar Realty Finance’s dividend payments are not sustainable. The company increased its annual dividend payment per share to $3.60 in 2014 from $1.84 in 2011, but paid out a much lower dividend of only $2.75 in 2015. Moreover, the company has been posting losses for several years even though total property and other revenues have been growing at an extremely high rate in recent years; the company’s top-line results increased to $1.82 billion in 2015 from $679.50 million in 2014 and $266.36 million in 2013. Shares of Northstar Realty Finance are down 65% in the past 12 months and were 20% in the red during the first quarter of this year, which probably explains the somewhat inflated dividend yield. Christian Leone’s Luxor Capital Group acquired a new stake of 5.32 million shares in Northstar Realty Finance Corp (NYSE:NRF) during the December quarter.

Williams Companies Inc. (NYSE:WMB)

– Elite Investors with Long Positions (as of December 31): 59

– Aggregate Value of Elite Investors’ Holdings (as of December 31): $4.72 Billion

– Dividend yield: 16.3%

The hedge fund sentiment towards Williams Companies Inc. (NYSE:WMB) declined meaningfully during the December quarter, with the number of money managers holding long positions in the company shrinking to 59 from 73 quarter-on-quarter. Similarly, the overall value of those positions dropped to $4.72 billion from $6.05 billion quarter-over-quarter. The energy infrastructure company boasts a whopping 16.3% yield, after the company increased its quarterly dividend of $0.57 per share in the fourth quarter of 2014 to $0.64 per share in the fourth quarter of 2015. Earlier this week, Williams Companies sued Energy Transfer Equity LP (NYSE:ETE) and its Chief Executive Officer Kelcy Warren, claiming they violated the merger agreement between the two parties executed in September 2015 by making a private offering of Series A Convertible Preferred Units. Williams Companies said the main reason behind the litigation was to ensure that “all ETE and Williams investors are treated fairly and equitably”, claiming that the private offering of convertible units served as a means of insulating Energy Transfer executives from a potential cut in distributions. Nonetheless, Williams Companies remains committed to the multi-billion-dollar merger deal, but most analysts believe that the turmoil around this deal has weighted the valuations of both companies. Shares of Williams Companies lost 35% in the first quarter of 2016, so it would be wise for investors to stay away from the two companies until their hurdles are resolved. Keith Meister’s Corvex Capital reported owning 41.68 million shares of Williams Companies Inc. (NYSE:WMB) as of the end of 2015.

Macquarie Infrastructure Corp (NYSE:MIC)

– Elite Investors with Long Positions (as of December 31): 58

– Aggregate Value of Elite Investors’ Holdings (as of December 31): $1.33 Billion

– Dividend yield: 6.94%

Macquarie Infrastructure Corp (NYSE:MIC) has also lost its charm within the hedge fund industry, as the number of hedgies from our systems bullish on the company decreased to 58 from 69 during the October-to-December period. However, the value of those funds’ stakes declined to only $1.33 billion from $1.48 billion quarter-on-quarter. The 58 money managers hoarded nearly 23% of the company’s outstanding common stock at the end of 2015. Macquarie Infrastructure owns, operates and invests in a diversified group of businesses, which include: a bulk of liquid terminals business; a provider of fuel, terminal and hangaring services; controlling interests in gas-fired, wind and solar power facilities; and a gas energy company. The company pays out an attractive annualized dividend of $4.60 per share, which equates to a current dividend yield of 6.94%. Nonetheless, some investors may be concerned over the company’s relatively high debt load. Specifically, Macquarie Infrastructure had $2.83 billion of debt outstanding at the end of 2015, whereas its cash balanced totaled only $22.4 million. Even so, the company’s available capacity under its revolving credit facilities reached $1.15 billion. According to fresh SEC filings, the company also plans to raise up to $396.95 million through a secondary offering of common stock, with the net proceeds being expected to cover general corporate expenses, as well as fund possible acquisitions and repay or refinance borrowings. The diversified company’s market valued lost 5% in the first quarter of 2016. Robert Boucai’s Newbrook Capital Advisors upped its stake in Macquarie Infrastructure Corp (NYSE:MIC) by 58% during the fourth quarter, ending 2015 with 1.05 million shares.

Staples Inc. (NASDAQ:SPLS)

– Elite Investors with Long Positions (as of December 31): 49

– Aggregate Value of Elite Investors’ Holdings (as of December 31): $1.05 Billion

– Dividend yield: 4.39%

There were 49 hedge funds monitored by Insider Monkey with positions in Staples Inc. (NASDAQ:SPLS) at the end of December, as compared to 54 funds registered at the end of September. By the same token, the overall value of their positions decreased to $1.05 billion from $1.34 billion during the fourth quarter. These 49 funds stockpiled roughly 17% of the company’s stock heading into 2016. The shares of the office-supply giant gained nearly 18% in the first quarter of this year, which has weighted on the company’s current dividend yield of 4.39%. Just recently, Fitch Ratings downgraded the credit rating and financial outlook for Staples because of “secular headwinds” and “flattish” sales anticipated for the upcoming years. Particularly, the ratings agency reduced the company’s long-term rating to BB+ from BBB- and downgraded its financial outlook to “negative” due to the ongoing uncertainty around the Staples-Office Depot Inc. (NASDAQ:ODP) merger. The largest U.S. office-supply retailers announced a merger agreement in February 2015, but the U.S. Federal Trade Commission has opposed the multi-billion-dollar merger, saying that it would hurt competition and trigger price increases. Meanwhile, Staples received approval from European Union regulatory authorities to acquire Office Depot in February 2016, on the condition that the acquirer divests Office Depot’s European contract business and entire Office Depot’s operations in Sweden. It is important to note that the company’s payout ratio reached 81% in 2015, so there isn’t lots of room for growth when it comes to dividend payments. Richard S. Pzena’s Pzena Investment Management owns 33.30 million shares of Staples Inc. (NASDAQ:SPLS) as of December 31.

AT&T Inc. (NYSE:T)

– Elite Investors with Long Positions (as of December 31): 48

– Aggregate Value of Elite Investors’ Holdings (as of December 31): $3.10 Billion

– Dividend yield: 4.39%

The smart money sentiment towards AT&T Inc. (NYSE:T) also declined in the final quarter of 2015; the number of funds with long positions in the company declined to 48 from 60 quarter-on-quarter. At the same time, the value of those positions shrunk to $3.10 billion from a higher figure of $3.76 billion quarter-over-quarter. AT&T is the perfect type of income paying stock most investors, both growth-oriented and income-seeking investors, would want to have in their portfolios. The provider of communications and digital entertainment services has seen its shares gain almost 12% since the beginning of 2016. Despite the exceptional stock performance, the stock continues to send shareholders fat dividend checks that yield 4.98% annually. Just recently, analysts at Jefferies upped their price target on AT&T to $44 from $40 and reiterated the ‘Buy’ rating the stock, citing “opportunity for continued outperformance driven by estimate upside (wireless margins, deal synergies) and supportive relative valuation”. Shares of AT&T currently change hands at around 12.9-times expected earnings, versus the forward P/E multiple of 14.0 for the telecommunication services sector. The relatively small multiple seems to suggest that investors do not anticipate strong future growth from the telecommunications giant, but the company’s management expects 2016 total revenue of $166.98 billion, which marks a 13.7% revenue growth rate. Warren Buffett’s Berkshire Hathaway had 46.58 million shares of AT&T Inc. (NYSE:T) in its equity portfolio at the end of December.

Disclosure: None