One of the greatest things about investing on Wall Street is that there are countless strategies that can be used to grow your wealth. While there's no one-size-fits-all approach, buying and holding high-quality dividend stocks has been a strategy that's fared better than most.
Last year, the investment advisors at Hartford Funds released a report ("The Power of Dividends: Past, Present, and Future") that examined the outperformance of dividend-paying stocks, when compared to non-payers, over time. In particular, one data set, which was calculated in collaboration with Ned Davis Research, found that dividend stocks more than doubled the average annual return of non-payers over a half-century: 9.17% to 4.27% between 1973 and 2023.
This outperformance isn't lost on Wall Street's smartest investing minds.
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Roughly one month ago, on May 15, institutional investors with at least $100 million in assets under management were required to file Form 13F with the Securities and Exchange Commission. A 13F allows investors under-the-hood access to see what stocks the top money managers bought and sold in the latest quarter (in this case, during the March-ended quarter).
While there was plenty of trading activity surrounding the "Magnificent Seven" and artificial intelligence stocks, one of the most surprising trends was seeing billionaire investors gravitate to ultra-high-yield dividend stocks. By "ultra-high-yield," I'm referring to income stocks whose yields are, at minimum, four times higher than the current yield of the S&P 500 (1.35%).
During the first quarter, we witnessed billionaires sink their teeth into three ultra-high-yield dividend stocks.
Verizon Communications: 6.58% yield
The first supercharged dividend stock billionaire investors simply couldn't get enough of during the March-ended quarter is telecom company Verizon Communications (VZ -0.49%). This nearly 6.6%-yielding telecom giant had three billionaires gobbling up shares, including (total shares purchased in parenthesis):
- Ken Griffin of Citadel Advisors (6,240,534 shares)
- Israel Englander of Millennium Management (1,065,290 shares)
- Steven Cohen of Point72 Asset Management (923,162 shares)
Even though Verizon's stock is broadly underperforming in the current bull market, there are a couple of catalysts that likely caught the attention of this billionaire trio.
To begin with, wireless access and broadband services have effectively evolved into basic necessity services. While consumers would be expected to cut back on their spending if economic growth slowed or a recession took shape, most would be highly unlikely to remove their wireless access or ability to surf the internet. Providing a basic need service tends to lead to highly predictable operating cash flow and low churn rates in any economic climate.
The 5G revolution has undeniably been a positive for Verizon, too. Wireless revenue has been consistently growing by the low-to-mid-single-digits, with users consuming more high-margin data. Meanwhile, Verizon's broadband net-additions have really begun to pick up. Though broadband isn't the growth story it was two decades ago, it provides the perfect jumping-off point to encourage high-margin service bundling.
Griffin, Englander, and Cohen might also be taking advantage of the fear that weighed down telecom stocks last July, when a Wall Street Journal report alleged that legacy telecom companies could face exorbitant cleanup costs tied to their use of lead-clad cables. While this isn't a concern to completely sweep under the rug, telecom companies are in no immediate danger of facing any financial liabilities associated with these allegations. This makes the single-digit forward price-to-earnings (P/E) ratios and high-yields attached to legacy telecom stocks quite attractive.
Pfizer: 5.99% yield
A second ultra-high-yield dividend stock that billionaire money managers were busy sinking their teeth into during the first quarter is pharmaceutical juggernaut Pfizer (PFE 1.39%). Five billionaires piled in, including (total shares purchased in parenthesis):
- John Overdeck and David Siegel of Two Sigma Investments (8,419,014 shares)
- Steven Cohen of Point72 Asset Management (986,405 shares)
- Ken Griffin of Citadel Advisors (879,463 shares)
- Ken Fisher of Fisher Asset Management (15,888 shares)
The interesting thing about the underperformance of Pfizer's stock over the last two years is that it's effectively been punished for its own success. After generating more than $56 billion in sales from its COVID-19 vaccine (Comirnaty) and oral therapy (Paxlovid) on a combined basis in 2022, Pfizer anticipates bringing in just $8 billion from these two treatments in 2024.
But if investors take a step back and widen their lens, they'll see a drug developer whose non-COVID sales have, as a whole, continued to expand. What's more, Pfizer's net sales are on track to have increased by approximately 43% in 2024 from where they stood at the end of 2020. Even with Comirnaty and Paxlovid sales soaring and then retracing, the company's novel drug portfolio is in considerably better shape now than it was four years ago -- and these five billionaires likely recognize this.
There's probably also some excitement about Pfizer's $43 billion acquisition of cancer-drug developer Seagen, which was completed in December. Although acquisition-related expenses will weigh on Pfizer's 2024 earnings per share (EPS), the company anticipates the combination of cost-savings and a meaningfully larger oncology pipeline will more than make up for this short-lived hiccup.
A sustainable 6% yield for an established drug developer trading at 10 times forward-year earnings is a solid deal.
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AGNC Investment: 15.06% yield
The third ultra-high-yield dividend stock that found itself high on the buy list for five billionaires during the March-ended quarter is none other than mortgage real estate investment trust (REIT) AGNC Investment (AGNC -0.31%). This monthly dividend payer, which supports a jaw-dropping 15% yield, was added by (total shares purchased in parenthesis):
- John Overdeck and David Siegel of Two Sigma Investments (3,082,672 shares)
- Israel Englander of Millennium Management (1,565,333 shares)
- Ken Griffin of Citadel Advisors (794,311 shares)
- Jeff Yass of Susquehanna International (561,809 shares)
Perhaps the most-surprising aspect of these five billionaires piling into AGNC Investment stock is just how much the mortgage REIT industry has been disliked for years. This is a highly interest-sensitive industry, and the steepest rate-hiking cycle in four decades, coupled with the longest inversion of the yield curve in the modern era, have done AGNC and its peers no favors.
On the other hand, history would suggest that patience is the appropriate course of action with mortgage REITs. The yield curve spends most of its time sloped up and to the right, with longer-dated Treasury bonds having higher yields than Treasury bills maturing in mere months. Eventually, the yield curve is going to return to normal, which should allow AGNC's net interest margin and book value to expand.
Monetary policy is another potential catalyst for AGNC Investment. Mortgage REITs perform their best in declining-rate environments. Further, with the Fed no longer purchasing mortgage-backed securities (MBS), the runway is clear for AGNC and its peers to scoop up now higher-yielding MBSs to hold for the long run.
The final puzzle piece that potentially attracted these prominent billionaires is AGNC's $63.3 billion investment portfolio. All but $1.1 billion is liquid agency assets. An "agency" security is backed by the federal government in the unlikely event of default. This protection allows AGNC the opportunity to lever its investments and increase its profits in order to sustain its high-octane dividend.
