David Einhorn’s Three Favorite Dividend Stocks

David Einhorn is one of the savviest hedge fund managers in the world. Since founding Greenlight Capital in 1996, Einhorn has achieved annual returns of around twice the market’s return. Einhorn did it by taking less risk than the market too. Because Einhorn’s fund shorts more than the average fund and shorting is hard, Einhorn’s long picks have to do very well to offset the short picks. So without further ado, let’s take a closer look at Einhorn’s top three dividend yield stocks and see how well they performed in the third quarter.

But why are we interested in hedge fund activity? From one point of view we can argue that hedge funds are consistently underperforming when it comes to net returns over the last three years, compared to the S&P 500. But that doesn’t mean that we should completely neglect their activity. There are various reasons behind the low hedge fund returns. Our research indicated that hedge funds’ long positions actually managed to beat the market. In our backtests covering the 1999-2012 period hedge funds’ top small-cap stocks edged the S&P 500 index by double digits annually. The 15 most popular small-cap stock picks among hedge funds also bested passive index funds by around 53 percentage points over the 37 month period beginning from September 2012, returning 102% (see more details here).

#3 Vodafone Group Plc (ADR) (NASDAQ:VOD)

Number of Hedge Fund Holders (as of June 30): 34
Total Value of Hedge Fund Holdings (as of June 30): $634.18 million
Hedge Fund Holdings as Percent of Float (as of June 30): 0.70%

Greenlight Capital kept its Vodafone Group Plc (ADR) (NASDAQ:VOD) position the same at 639,294 shares from April 1 to June 30. Vodafone Group Plc (ADR) (NASDAQ:VOD) is one of the world’s largest telecoms, with a market capitalization of over $100 billion. The company has mobile networks in 26 countries and is the largest telecommunications provider by percentage of revenue generated in Germany and the United Kingdom.

Vodafone’s shares fell by 12.9% in the third quarter but the company’s 7.45% dividend yield is secure. The company has nearly $17 billion in cash on its balance sheet and has very steady and predictable cash flows. The strong cash flows and piles of cash on its balance sheet allows the company to pay the dividend in good times and bad. As long as the smartphone doesn’t go away, Vodafone will make money and pay a dividend. Jonathon Jacobson‘s Highfields Capital Management increased its position in Vodafone by 26% to 3.77 million shares in the second quarter.

We look at Einhorn’s two favorite dividend stocks on the following page.

#2 General Motors Company (NYSE:GM)

Number of Hedge Fund Holders (as of June 30): 104
Total Value of Hedge Fund Holdings (as of June 30): $5.78 billion
Hedge Fund Holdings as Percent of Float (as of June 30): 10.90%

Greenlight Capital increased its General Motors Company (NYSE:GM) position by 55% to 14.65 million shares in the second quarter, as the company has largely moved on from its recall problems. General Motors Company (NYSE:GM) is a much healthier company than it was a decade ago, with less legacy pension costs. Shares fell by 8.8% in the third quarter due to the weaker broader market.

Even though it shed some of its costs, General Motors is still the leading automotive company in the United States, with 17% market share in the U.S. automobile and truck market. General Motors is also doing well internationally, as it gets around 40% of its revenue from overseas. The connected and autonomous car offers further growth opportunities in the future.

With a dividend yield of 4.07% and a forward P/E of 6.8, General Motors’ shares are attractive. Besides Greenlight, the company also counts several other elite investment firms as major holders, including Warren Buffett‘s Berkshire Hathaway and David Tepper’s Appaloosa Management LP.

#1 Apple Inc. (NASDAQ:AAPL)

Number of Hedge Fund Holders (as of June 30): 144
Total Value of Hedge Fund Holdings (as of June 30): $21.27 billion
Hedge Fund Holdings as Percent of Float (as of June 30): 2.90%

Apple Inc. (NASDAQ:AAPL) may not seem like a dividend stock, but it pays $0.52 per share every quarter, good for a 1.83% dividend yield. The company has either maintained or raised its dividend every quarter since the middle of 2012.

Although shares fell by 11.7% in the third quarter, Apple Inc. (NASDAQ:AAPL)’s dividend is safe, as the company Steve Jobs founded is the leading smartphone company in the world, with a world-class brand and workforce, along with a strong ecosystem of software producers that produce for Apple’s iPhone first, and everything else later. There are some growth opportunities, as the company is rumored to be working on a smart-car product that could come onto the market as early as 2020. Virtual reality, the connected healthcare home, and artificial intelligence are other potential markets.

Because its brand has so much cachet, Apple dominates the most important category of all: smartphone profit share. Apple made $39.51 billion in profits in 2014 and will earn even more in 2015 and 2016. Apple’s big profits and the hundreds of billions of dollars on its balance sheet offer the potential for it to increase its dividend even further this year. At a forward P/E of 11.6, the stock looks cheap.

Many hedge funds own Apple Inc. (NASDAQ:AAPL). Within our extensive database of around 730 hedge funds, Apple is the second-most popular stock, with 144 funds owning $21.27 billion of the company’s shares as of the end of June. Carl Icahn‘s Icahn Capital LP owns 52.76 million shares, which represents around 21% of his equity portfolio, while Einhorn’s Greenlight owns 7.38 million shares, which represents 11.61% of his portfolio.

Disclosure: None