JPMorgan’s Top Dividend Stocks for 2016, Part 4

In the fourth and final part of our series of articles covering JPMorgan’s favorite dividend stocks for 2016, we cover Iron Mountain Inc (NYSE:IRM), KLA-Tencor Corp (NASDAQ:KLAC), Lockheed Martin Corporation (NYSE:LMT), Michaels Companies Inc (NASDAQ:MIK), and PACCAR Inc (NASDAQ:PCAR), each of which have their own unique and compelling qualities that dividend investors covet.

See also:

JPMorgan’s Dividend Stocks for 2016, Part 1

JPMorgan’s Dividend Stocks for 2016, Part 2

JPMorgan’s Dividend Stocks for 2016, Part 3

Moreover, we will also examine relevant hedge fund sentiment toward the equities. Most investors don’t understand hedge funds and indicators that are based on hedge funds’ activities. They ignore hedge funds because of their recent poor performance in the bull market. Our research indicates that hedge funds underperformed because they aren’t 100% long. Hedge fund fees are also very large compared to the returns generated and they reduce the net returns experienced by investors. We uncovered that hedge funds’ long positions actually outperformed the market. For instance the 15 most popular small-cap stocks among funds beat the S&P 500 Index by 52 percentage points since the end of August 2012. These stocks returned a cumulative of 102% vs. 48.6% gain for the S&P 500 Index (see the details here). That’s why we believe investors should pay attention to what hedge funds are buying (rather than what their net returns are).

Iron Mountain Inc (NYSE:IRM)

– Number of Hedge Fund Holders (as of September 30): 14
– Total Value of Hedge Fund Holdings (as of September 30): $373.72 million
– Hedge Fund Holdings as Percent of Float (as of September 30): 5.70%

The analysts at JPMorgan love Iron Mountain Inc (NYSE:IRM)’s growing annuity stream business. They think management will take advantage of cost opportunities to increase margins, which will provide more cash flow to grow the dividend. Moreover, the closing of the company’s acquisition of Recall could be a positive catalyst in early 2016. Shares currently yield 7.2%, more than triple the ten year Treasury’s yield. Among the 14 elite holders of Iron Mountain Inc (NYSE:IRM) include Jonathon Jacobson‘s Highfields Capital Management.

KLA-Tencor Corp (NASDAQ:KLAC)

– Number of Hedge Fund Holders (as of September 30): 28
– Total Value of Hedge Fund Holdings (as of September 30): $256.41 million
– Hedge Fund Holdings as Percent of Float (as of September 30): 3.30%

Although KLA-Tencor Corp (NASDAQ:KLAC) agreed to sell itself to Lam Research Corporation (NASDAQ:LAM) in October for $32.00 in cash and 0.5 shares of Lam Research stock for every share of KLA-Tencor, the analysts at JPMorgan think KLA’s stock is still a great dividend play. KLA shares pay an attractive 3% dividend yield, and the acquisition of KLA isn’t expected to close until mid-2016. Joel Greenblatt’s Gotham Asset Management and 27 other elite funds were bullish on KLA-Tencor at the end of September.

Lockheed Martin Corporation (NYSE:LMT)

– Number of Hedge Fund Holders (as of September 30): 39
– Total Value of Hedge Fund Holdings (as of September 30): $1.2 billion
– Hedge Fund Holdings as Percent of Float (as of September 30): 1.90%

Lockheed Martin Corporation (NYSE:LMT), a leading defense contractor and the maker of the F-35, is also a leading dividend stock in the eyes of the analysts at JPMorgan. Specifically, the analysts like Lockheed’s shareholder friendly management, as the company plans to return all its excess cash flow to shareholders through dividends and share repurchases through 2017. The buybacks should fuel growth in the defense contractor’s already attractive 3% dividend yield. The buy-side is also bullish, with the number of elite funds from our database long the stock rising by three to 39 during the third quarter. Among the bullish mangers is Cliff Asness’ AQR Capital Management, which owned 652,724 shares at the end of September.

Michaels Companies Inc (NASDAQ:MIK)

– Number of Hedge Fund Holders (as of September 30): 21
– Total Value of Hedge Fund Holdings (as of September 30): $275.18 million
– Hedge Fund Holdings as Percent of Float (as of September 30): 5.70%

The analysts at JPMorgan are buyers in Michaels Companies Inc (NASDAQ:MIK) and management’s turnaround efforts, which show some signs of success given the improving marketing, merchandising, and in-store execution. The analysts also like the company’s high cash generative capability, barriers of entry, and leadership position in the sector. Although Michaels Companies doesn’t pay a dividend, the analysts included it on their list because the company certainly has the potential to. Jonathon Jacobson‘s Highfields Capital Management was long 6.32 million shares of Michaels Companies at the end of September.

PACCAR Inc (NASDAQ:PCAR)

– Number of Hedge Fund Holders (as of September 30): 34
– Total Value of Hedge Fund Holdings (as of September 30): $450.79 million
– Hedge Fund Holdings as Percent of Float (as of September 30): 2.40%

Although JPMorgan has a ‘Neutral’ rating and $55 price target on PACCAR Inc (NASDAQ:PCAR) due to the anticipated margin pressure and lower volume on the back of a decreasing demand in the North American HD truck business in 2016, the analysts think PACCAR should trade at a premium due to its track record of good execution. Moreover, the stock pays an attractive dividend yield of 4.1% when factoring in the normal and special dividend payouts. Shares of the company trade for 11.3 times forward earnings.

Disclosure: none