We recently published a list of 10 Best Dividend Paying Stocks To Buy According to Quant Hedge Fund AQR. In this article, we are going to take a look at where Broadcom Inc. (NASDAQ:AVGO) stands against the other dividend-paying stocks to buy according to Quant Hedge Fund AQR.
Only a handful of hedge funds have pursued unique investment strategies, and Cliff Asness’ Applied Quantitative Research, or AQR Capital, stands out among them. Known for its quantitative value strategies, Asness co-founded AQR in 1998 after working at Goldman Sachs. He and his partners developed the firm’s investment approach during their time in the University of Chicago’s Ph.D. program, emphasizing value and momentum strategies. These distinct approaches have delivered strong results for the fund over the years. In fact, AQR’s longest-running multistrategy fund returned 18.5% last year after fees, and had its best year in 2022, with a 43.5% gain. In January 2023, Asness forecasted that buying undervalued companies while shorting overvalued ones in particular sectors would be especially advantageous for that year.
Given the growing focus on generative AI and machine learning, Asness mentioned that his natural inclination is to be contrarian. However, he acknowledges that he needs to move past this instinct because he recognizes significant opportunities in machine learning. During a recent Bloomberg Invest conference, Asness highlighted that they increasingly rely on automated decision-making at AQR, expressing a belief that the machine might have a slight edge over human judgment. The firm’s improved performance in recent years is partly attributed to market cycles, but it has also implemented some changes.
Though Asness is now directing his focus toward artificial intelligence, diversification has always been a fundamental aspect of his investment strategy. He believes that concentrating investments into a single asset does not adequately address the inherent risks in financial markets. According to Asness, the rationale for preferring a diversified portfolio lies in its potential to provide a higher return for the risk taken, rather than simply offering a higher expected return.
When discussing diversification, different investment strategies can have varying advantages. Dividend investing is particularly popular among investors. In his paper published in the Financial Analysts Journal, which earned him the Graham and Dodd Award for the best paper of the year twice, Asness emphasized the value of dividends. He explained that companies that distribute higher dividends generally experience stronger earnings growth over the following decade compared to those that pay out less. Asness elaborated that substantial dividend payouts often indicate a company’s confidence in its future prospects, as firms are reluctant to cut dividends and typically wouldn’t pay them if they anticipated poor performance. Furthermore, companies paying large dividends must be more selective with their investment projects, potentially leading to wiser investment choices. On the other hand, companies that pay minimal dividends might be either struggling (as seen with inflated earnings in 1999) or engaging in “empire building,” where managers, having plenty of cash, may invest imprudently in less profitable ventures.
Asness’s preference for dividend stocks is also apparent in his Q2 2024 portfolio, which features a significant number of dividend-paying equities. With that in mind, we will take a look at some of the best dividend-paying stocks according to AQR Capital.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A technician working at a magnified microscope, developing a new integrated circuit.
Broadcom Inc. (NASDAQ:AVGO)
AQR Capital’s Stake Value: $483,336,114
Dividend Yield as of August 22: 1.24%
Broadcom Inc. (NASDAQ:AVGO) is a California-based multinational semiconductor company that offers a wide range of semiconductor and infrastructure software products. The company offers network and data center solutions, along with cloud-based tools, through its subsidiary, VMware. Although about 60% of the company’s revenue comes from semiconductor solutions, its infrastructure software segment is also experiencing significant growth. The company offers a compelling opportunity at the crossroads of AI and semiconductors. Over the past year, the stock has risen by nearly 90%, prompting management to implement a 10-for-1 stock split in July to make Broadcom shares more accessible to investors and employees.
Baron Funds highlighted the company’s AI segment in its Q2 2024 investor letter. Here is what the firm has to say about Broadcom Inc. (NASDAQ:AVGO):
“Broadcom Inc. (NASDAQ:AVGO) is a global technology leader that designs, develops, and supplies a broad range of semiconductor and infrastructure software solutions. The stock rose during the quarter as it reported strong earnings on the back of its two key growth drivers, AI semiconductors and its acquired VMware software business. The company once again increased its outlook for AI-related revenue, now expecting $11 billion or more this year (versus prior guidance for $10 billion), on the back of strength in both hyperscale custom compute and networking chips, where Broadcom maintains dominating share. In networking, Broadcom’s solutions are critical to enabling AI training factories to scale towards 100,000 chip clusters in the near term and 1 million chip clusters over the coming years. In AI custom compute, Broadcom designs custom accelerators for large consumer- internet AI companies (such as Google and Meta), who are building increasingly large AI clusters to drive improvements in user engagement and targeted advertising on their consumer media platforms. VMware remains on track to continue rapid sequential growth while simultaneously reducing operating expenses, driving faster-than-expected margin expansion and accretion, as management has simplified the product offering and is converting customers from a license model to subscriptions. We believe VMware will grow beyond the $4 billion near-term quarterly target, well above current analyst expectations. These two factors combined have caused a re-rating to the growth profile for the overall company. To quote CEO Hock Tan, “there is only one Broadcom. Period.”
When we evaluate Broadcom Inc. (NASDAQ:AVGO) from a dividend perspective, it becomes clear that its strong cash generation sets it apart from its competitors, particularly within the tech industry. In the second quarter of 2024, the company generated over $4.5 billion in operating cash flow and its free cash flow for the period came in at over $4.4 billion. The free cash flow represented 36% of the company’s revenue. During the quarter, it also distributed $2.5 billion worth of dividends among shareholders, which makes it one of the best dividend-paying stocks on our list.
Though many tech companies offer dividends, only a few consistently deliver substantial returns to shareholders. Broadcom Inc. (NASDAQ:AVGO) is notable for its strong dividend history. Since initiating dividends in 2011, the company has increased its payouts annually. Over the years, its annual dividend has risen from $0.36 per share to $21.00 per share. Its quarterly dividend comes in at $5.25 per share for a dividend yield of 1.24%, as of August 22.
Broadcom Inc. (NASDAQ:AVGO) was a popular buy among elite funds during the second quarter of 2024 as the hedge fund positions in the company jumped to 130, from 115 in the previous quarter. The stakes owned by these hedge funds are valued at over $20 billion in total. Among these hedge funds, GQG Partners was the company’s leading stakeholder in Q2.
Overall AVGO ranks 3rd on our list of the best dividend paying stocks to buy according to Quant Hedge Fund AQR. While we acknowledge the potential of AVGO as an investment, our conviction lies in the belief that some deeply undervalued dividend stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued dividend stock that is more promising than AVGO but that trades at less than 7 times its earnings and yields nearly 10%, check out our report about the dirt cheap dividend stock.
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Disclosure: None. This article is originally published at Insider Monkey.