Five Dividend Stocks Hedge Funds Love

Oil baron and America’s first billionaire John D. Rockefeller once said, ‘do you know the only thing that gives me pleasure? It’s to see my dividends coming in’. With tens of millions of more Americans invested in the stock market than in the early 1900’s, it is safe to say that dividends are giving more people pleasure than in the 1900’s. Given the importance of dividends to a security’s total return, we use recently filed 13F filings to take a closer look at some of the hedge fund world’s favorite dividend stocks, including Pfizer Inc. (NYSE:PFE), Wells Fargo & Co (NYSE:WFC), Merck & Co., Inc. (NYSE:MRK), General Motors Company (NYSE:GM), and AbbVie Inc (NYSE:ABBV).

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Hedge fund sentiment is an important metric for assessing the long-term profitability. At Insider Monkey, we track over 760 hedge funds, whose quarterly 13F filings we analyze and determine their collective sentiment towards several thousand stocks. However, our research has shown that the best strategy is to follow hedge funds into their small-cap picks. This approach can allow monthly returns of nearly 95 basis points above the market, as we determined through extensive backtests covering the period between 1999 and 2012 (see the details here).

#5 AbbVie Inc (NYSE:ABBV)

– Number of Hedge Fund Holders (as of March 31): 65
– Total Value of Hedge Fund Holdings (as of March 31): $5.28 billion
– Hedge Fund Holdings as Percent of Float (as of March 31): 5.70%

With 65 funds from our database among its shareholders, AbbVie Inc (NYSE:ABBV) is the fifth most popular dividend stock. AbbVie pays an annual dividend of $2.28 per share, which gives its stock a dividend yield of 3.64%. The company’s dividend is relatively safe, given the payout ratio of 64.3% and the expected five-year EPS average growth of 16.4%. The drug company reported better-than-expected earnings for its first quarter, with EPS of $1.15 versus the consensus of $1.13. Humira sales rose 15% year-over-year. Among the funds that own shares of the company is Larry Robbins’ Glenview Capital. Shares are up 8% year-to-date, but trade at a forward P/E of only 11.13.

#4 General Motors Company (NYSE:GM)

– Number of Hedge Fund Holders (as of March 31): 67
– Total Value of Hedge Fund Holdings (as of March 31): $3.72 billion
– Hedge Fund Holdings as Percent of Float (as of March 31): 7.60%

General Motors Company (NYSE:GM) is betting big on ride sharing. The company made a $500 million investment in ride sharing app Lyft in January, and recently committed to testing self-driving Chevrolet Bolt EVs with Lyft within a year. If the project is successful, Lyft will be a stronger competitor to Uber, making the company a bigger customer of General Motor’s vehicles. Although it has substantial pension liabilities, General Motors has one of the widest moats in the industry given its brand and economies of scale. The company trades for 5.3 times forward earnings and its stock sports a dividend yield of almost 5% at current prices. David Einhorn’s Greenlight Capital was one of the top shareholders of General Motors at the end of March.

#3 Merck & Co., Inc. (NYSE:MRK)

– Number of Hedge Fund Holders (as of March 31): 70
– Total Value of Hedge Fund Holdings (as of March 31): $2.49 billion
– Hedge Fund Holdings as Percent of Float (as of March 31): 1.70%

Merck & Co., Inc. (NYSE:MRK) is one of the giants in the pharmaceutical industry. With multiple hit drugs such as Januvia and Janumet, the company is an earnings machine, making the dividend safe. Merck reported earnings of $0.89 per share for its first quarter, or almost double the company’s quarterly dividend payout of $0.46 per share, with its stock having a dividend yield of 3.26%. 2016 EPS guidance stands at between $3.65 and $3.77, better than the management’s previous forecast of $3.60 to $3.75. As some of its products fall off the patent cliff, look for Merck to get involved in M&A to boost its portfolio and increase its cash flow.

#2 Wells Fargo & Co (NYSE:WFC)

– Number of Hedge Fund Holders (as of March 31): 90
– Total Value of Hedge Fund Holdings (as of March 31): $29.76 billion
– Hedge Fund Holdings as Percent of Float (as of March 31): 12.10%

Wells Fargo & Co (NYSE:WFC) reported excellent results for its first quarter, earning $0.99 per share on sales of $22.19 billion, beating expectations by $0.01 and $590 million, respectively. Average loans rose by 7% year-over-year, while average deposits inched up by 4% year-over-year. Wells Fargo’s management has recently raised the quarterly dividend to $0.38 per share from the previous $0.375 per share, giving the stock a dividend yield of 3%. The future looks bright for the company.  Crude prices have surged by over 80%, trimming the bank’s exposure to bad energy loans. Many investors expect the Federal Reserve to raise interest rates next month, helping increase Wells Fargo’s net interest margin. The bank’s valuation is reasonable with the stock trading for 11.5 times forward earnings estimates. Warren Buffett’s Berkshire Hathaway owned almost 480 million shares at the end of the first quarter.

#1 Pfizer Inc. (NYSE:PFE)

– Number of Hedge Fund Holders (as of March 31): 119
– Total Value of Hedge Fund Holdings (as of March 31): $8.37 billion
– Hedge Fund Holdings as Percent of Float (as of March 31): 4.60%

Although Pfizer Inc. (NYSE:PFE)’s deal to merge with Allergan plc Ordinary Shares (NYSE:AGN) to save on taxes failed, the company remains a great dividend holding. The drug giant turned in a solid first quarter, beating EPS and revenue estimates by $0.12 per share and $1 billion, respectively, having reported earnings of $0.67 per share on sales of $13 billion. For the full year, the company expects adjusted EPS of $2.38 to $2.48 on revenue of $51 to $53 billion. The robust EPS guidance is good news for the dividend. Pfizer currently pays a $0.30 per share quarterly dividend, which gives its stock a 3.5% yield. If EPS continues to grow, look for Pfizer to raise the dividend further. Ken Fisher’s Fisher Asset Management was one of the top shareholders of Pfizer at the end of March.

Disclosure: none