While it's never a good idea to simply copy what other investors are doing, it can be worthwhile to look at what the biggest money investors own for ideas. This is just as true for dividend payers as for any other category of stocks. And with interest rates still near record lows, income investors are especially on the hunt for yield.
With this in mind, we asked three of our contributing investors to identify a high-yield stock they like that has a high level of hedge fund and investment manager ownership, and they came up with two cash-flow stalwarts in Brookfield Infrastructure Partners L.P. (NYSE:BIP) and Duke Energy Corp. (NYSE:DUK), and a surprising alternative in Apollo Global Management LLC (NYSE:APO), one of the biggest managers of alternative asset portfolios in the world.
Keep reading to learn what we like about these three high-yield stocks, and why they might be an ideal fit for your income-generating portfolio.
An infrastructure partnership the big funds love to own
Jason Hall (Brookfield Infrastructure Partners L.P.): With more than 40% its shares held by hedge funds and investment managers, infrastructure asset manager Brookfield Infrastructure Partners has very deep institutional ownership -- in no small part because the master limited partnership (MLP) has proved capable of delivering a strong income stream, and increasing its payout on a regular basis.
At recent prices, Brookfield Infrastructure yields 4% and has increased its dividend every year since going public in 2009. Furthermore, increasing the payout is a core goal of the partnership, with a stated objective of generating a long-term return of 12%-15% on equity, and increasing the distribution (MLP-speak for "dividend") 5%-9% per year.
Brookfield's focus on highly critical global infrastructure assets, such as water, power, natural gas, toll roads, ports, and telecom, has allowed it to deliver on this goal for years. One of my favorite things about Brookfield Infrastructure is that the nature of its asset portfolio makes it both inflation and recession resistant. Water, energy, and telecom assets are necessary in every economic environment, and the majority of its cash flows are in contracts with inflation adjustments built in.
Trading for less than 10 times funds from operations, Brookfield Infrastructure is a solid value today. With its great track record of dividend growth and a huge need for increased global infrastructure in the coming decades, this is one of my favorite high-yield dividend stocks to buy right now.
Why Wall Street is eyeing this utility's dividend
Neha Chamaria (Duke Energy): Duke Energy isn't just lighting up millions of homes in the U.S. but is also powering up the portfolios of some of the biggest funds, including the Vanguard Group, BlackRock, and State Street Corp., to name a few. Combined, these three titans owned almost 18% stake in Duke Energy as of June 30, 2017, with the first two also increasing their stakes last quarter. Surely, there must be something in this utility to have caught these hedge funds' attention. I believe renewable energy is one of them, as these funds are increasingly turning attention to the clean-energy space.
Duke Energy is rapidly reducing its dependence on fossil fuels such as coal and shifting toward natural gas. There's no greater evidence than the company's acquisition of Piedmont Natural Gas last year that added a million natural gas customers to Duke's portfolio. The following chart from Duke Energy's latest retail investor presentation reveals how its Duke's fuel mix has changed in the past decade, and where it's headed.
By 2026, Duke expects to generate as much as 72% of its power from natural gas, hydro, wind, solar, and nuclear energy. That's certainly a green flag for investors, as Duke Energy is putting money into future energy trends, which should be rewarding in the long run.
In fact, Duke Energy has already set out a dividend goal, aiming to grow it by 4%-6% in line with its projected earnings-per-share growth through 2021. When you factor in the stock's 4% yield -- which also looks sustainable -- shareholders can expect high-single-digit percentage returns from their investment in Duke Energy today. For a company eyeing clean energy and backed by top hedge funds, that's a pretty compelling opportunity for an income investor.
A high yield with a twist (and some risk)
Reuben Gregg Brewer (Apollo Global Management LLC): If you're looking for a high-yield hedge-fund stock, you can buy a stock that hedge funds are buying, or you can buy a publicly alternative asset fund manager like Apollo Global Management. Its dividend varies over time with the alternative asset manager's results, but the yield is currently around 6%. And its dividend has been increased in each of the past three quarters.
The future, meanwhile, looks pretty bright right now. For example, CEO Leon Black noted in the second-quarter conference call that Apollo had "accepted commitments of $24.7 billion for our latest flagship private equity fund, Apollo Investment Fund IX, the largest dedicated private equity fund ever raised." Those assets mean Apollo has plenty of cash to keep doing deals -- such as the recently announced $1.1 billion all-cash acquisition of golf-course and country-club owner ClubCorp Holdings. Apollo has roughly $200 billion in assets under management today, up from $25 billion when it came public in 2006.
What's interesting here is that buying Apollo changes the investment equation for you. You aren't betting on having just one stock go up or down. You're making money by investing in the company doing the investing. That means the revenue and earnings backing your dividends comes from management fees and incentive bonuses based on successful investments. The larger the asset base, the more money Apollo can earn, which is why raising a new fund with nearly $25 billion in it is so exciting. The company's goal is to expand its globally diversified business, over time, to $250 billion in assets under management.
Always keep in mind that the dividend will vary with Apollo's investment success, with a floor based on the management fees it charges and assets under management. The ups and downs will come from performance-based incentives. But if you're looking for a high-yield hedge-fund stock, owning a hedge-fund manager could be a great way to diversify and get paid at the same time.
Jason Hall owns shares of Brookfield Infrastructure Partners. Neha Chamaria has no position in any of the stocks mentioned. Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Brookfield Infrastructure Partners. The Motley Fool has a disclosure policy.