Ray Dalio began investing when he was a boy. At the age of 12, Dalio bought shares of Northeast Airlines for about $300. The company was later merged with and Dalio successfully tripled his investments. Dalio is a BA from Long Island University and an MBA from Harvard. After graduating, he worked at New York Stock Exchange, trading commodity futures. He has also worked as the director of commodities at Dominick & Dominick LLC and as a trader and broker at Shearson Hayden Stone. In 1975, he founded Bridgewater Associates, his own investment management firm, in a two-bedroom apartment. Today, Bridgewater is the largest hedge fund in the world and its flagship fund has also been up for 5 consecutive years. According to Forbes, Dalio is currently the 44th richest American with a net worth of about $6.5 billion.
Dalio recently reported his latest 13F portfolio to the SEC. In this article, we are going to discuss the dividend stocks that Dalio is bullish about. We are very bullish about dividend stocks but would like to invest in only those that can also deliver high capital gains. One the best places to look for dividend stocks is the portfolios of successful hedge funds. Here are Ray Dalio’s dividend picks:
BCE Inc (BCE): BCE is a new position in Dalio’s portfolio. During the fourth quarter, Bridgewater initiated a brand new $17 million position in BCE. A few other fund managers were also bullish about BCE. For example Louis Navellier was the most bullish fund manager about BCE. Navellier & Associates had nearly $40 million invested in BCE at the end of September. Louis Bacon and Jim Simons were also bullish about BCE.
BCE looks attractive. It has a high dividend yield of over 5% and a possible alternative to long-term Treasury bonds. BCE will not underperform 10-year treasury bonds unless it loses over 25% in the next decade. During the past year, BCE has been increasing its investments in expanding its wireless and broadband operations. We also see strong revenue and earnings growth as well as strong cash flows. For the fourth quarter last year, BCE announced net income of $512 million on total revenue of $5.2 billion, compared with $347 million net income on $4.7 billion total revenue. Its net operating cash flow also increased by nearly 50% to $840 million. BCE seems to be undervalued too. It has a low current P/E ratio of 13.82. Analysts expect the stock to grow at around 5% per year in the next few years. BCE is not a growth stock, but it is definitely a good option for dividend investors.
CA Inc (CA): CA is also a large dividend position in Dalio’s latest portfolio. As of December 31, 2011, Bridgewater had $11 million invested in this stock. CA is also quite popular among hedge funds tracked by us. At the end of the third quarter, there were 20 hedge funds with CA positions in their 13F portfolios. Besides Dalio, Cliff Asness, Israel Englander, and Jim Simons were also bullish about the stock. All their funds had over $10 million invested in CA at the end of September.
Although CA has a dividend yield of 3.71%, which almost doubles that of 10-year Treasury, we are still not very bullish about this stock. Instead, we recommend investors to “hold” CA at this moment. Compared with other software companies, CA has relatively small share in cloud computing market, while analysts believe that most of the growth in the tech industry will be focused on cloud computing in the next few years. For the three months ending December 31, 2011, the company reported decent revenue and earnings results. Its revenue increased from $1.14 billion for the same period of 2010 to $1.26 billion, and its EPS also increased from $0.38 to $0.54. However, the sales numbers for CA’s Enterprise Solutions new product is disappointing. Following a 20% decline in the September quarter, new product sales again declined by 5% over the December quarter.
We think other tech stocks with similar dividend yields are better options for investors. Intel (INTC) has a 3.1% dividend yield but it has been increasing its dividends aggressively. Intel’s forward PE ratio is 11 vs. 12.6 for CA, and Intel is expected to grow its earnings faster than CA. That’s why we recommend Intel instead of CA Inc.
Arch Coal Inc (ACI) is another large position in Dalio’s portfolio with dividend yield of over 3%. It has a dividend yield of 3.1% and the company has been increasing the dividend payouts for 8 consecutive years. The stock’s forward P/E ratio is only 12.7 and its expected EPS grow rate is over 20%. Arch Coal lost almost 60% over the last 52 weeks. We don’t think Dalio is picking Arch Coal because of its dividend yield. The stock might be able to recover some of the lost ground over the next few months as energy prices are starting to pick up again.
