If you want to be a successful investor, you have to follow your own path. But that doesn't mean you should close your eyes to what other investors are doing. Often, their moves will give you insight into smart investment ideas you might otherwise have overlooked.
Unfortunately, the high-powered hedge funds that often have the most phenomenal results are also off-limits to many investors. With regulations requiring you to have high levels of income or net worth in order to invest in hedge funds and other similar alternative investments, you may think Wall Street has closed the doors to you.
But with the help of AlphaClone, an online hedge fund research and investment management firm that provides data on the portfolios of hundreds of different hedge funds and institutional investors. Over the past several months, I've been tapping AlphaClone to try to come up with better stock ideas from Wall Street's finest. Today, I'm going to show you the five favorite dividend stocks that top professional investors own in their portfolios.
Picking the top 5
Using AlphaClone, I searched through the customized database of 324 institutions to figure out which stocks most often came up among their top holdings. That resulted in a list of 20 stocks, with Apple (Nasdaq: AAPL ) being the most popular, appearing in 92 funds' portfolios. Apple, of course, doesn't pay a dividend, much to the chagrin of many of its shareholders.
From there, I narrowed down the list to include only those dividend stocks with current yields of 3% or more. Here's the final cut, ranked by dividend yield:
No. of Funds Holding
|Pfizer (NYSE: PFE )||54||3.9%|
|ConocoPhillips (NYSE: COP )||37||3.7%|
|Johnson & Johnson (NYSE: JNJ )||37||3.5%|
|General Electric (NYSE: GE )||38||3.1%|
|Procter & Gamble (NYSE: PG )||30||3.1%|
|Chevron (NYSE: CVX )||54||3.0%|
Sources: AlphaClone, and Capital IQ, a division of Standard & Poor's.
As you can see, dividend stocks are just as popular among institutional investors as they are among individual investors. Given widespread concerns about the length of the bull-market bounce off the lows of the market meltdown, hedge-fund portfolio managers clearly believe that stocks that make reliable payouts to shareholders have an edge over their peers. But have these top stocks actually performed better overall?
Show me the money
To answer that question, I looked at the five-year returns of these six stocks and compared them with the lower-yielding 14 stocks. On average, the high-dividend stocks returned 4.5% annually since 2006, while the others came in with 3.1% annual returns.
Of course, that by itself doesn't ensure that these stocks are smart plays for the future. Energy stocks are well-represented among the dividend elite, but a sudden drop in oil prices or a weakening economic recovery could send ConocoPhillips and Chevron back down from recent highs. Similarly, Pfizer and Johnson & Johnson share some serious business concerns, with a host of drugs coming off patent in the years ahead and J&J still facing fallout from the slew of recalls it has had in the past year and a half. And although GE seems to have handled the worst of the financial crisis, it still has to move ahead with its core industrial businesses. Even consumer giant Procter & Gamble has room to stumble if it doesn't take growing competition from private-label brands seriously.
But investors in these stocks can be confident about one thing: They've all taken steps to ensure that they'll be able to pay dividends well into the future. That's not to say they've all been consistent; GE and Pfizer have both slashed their dividends in recent years. But since then, both of the companies have started on the recovery path by raising their payouts twice. Moreover, the other stocks all have streaks of 10 years or longer of raising their dividends annually.
Investing isn't just about seeing stocks rise. It's about getting paid for your smart ideas. Dividend stocks do that every quarter, and with the right ones in your portfolio, you can earn returns that will put some hedge funds to shame.