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3 High-Yield Hedge Fund Stocks to Buy

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Are hedge funds on to something with these three high-yield stocks? We think they might just be.

It can work out poorly to try copying the big-money investors, and for a number of reasons. But at the same time, it can pay off to at least study what successful investors buy and sell, looking for opportunities to do well. That's the case for high-yield dividend stocks, too. 

We asked three of our contributing investors to get in on the discussion and give us a high-yield stock that they agree with private equity investors on. They came up with GameStop Corp. (GME 0.92%)Buckeye Partners, L.P. (BPL), and Verizon Communications Inc. (VZ 1.75%). With yields between 4.6% and 8.5%, they all make wonderful potential income investments. 

Hands reaching up for a dollar bill, just out of reach.

Image source: Getty Images.

Keep reading to learn what makes these high-yield stocks worth buying today. 

GameStop's 7% dividend yield

Demitri Kalogeropoulos (GameStop): Hedge funds are snapping up shares in GameStop right now. Fund ownership has risen over the last few months, and the stock remains a top holding of a few major institutional investors.

It's not hard to see why big buyers would be attracted to the specialty retailer. After all, its latest earnings report showed steady operating trends, with comparable-store sales ticking higher by 2%. Sure, the core business is being disrupted by a consumer stampede away from video game discs in favor of digital game purchases. However, GameStop has been preparing for this situation for years, and its new business lines like consumer tech and collectibles are contributing to overall sales gains.

Happy young man and woman playing video games.

Image source: Getty Images.

A GameStop stock buy carries significant risks today, especially heading into a holiday season that could mark an acceleration of the consumer embrace of digital gaming purchases. Pessimism about whether CEO Paul Raines and his executive team can navigate that shift has helped push shares down over 15% this year to a valuation of just six times earnings -- compared to 22 for the broader market. That could set the stage for decent long-run returns if the company outperforms Wall Street's low expectations in its pivot away from video games. That 7% dividend yield, meanwhile, is well covered by the retailer's ample cash flow.

Spending for the future

Reuben Gregg Brewer (Buckeye Partners, L.P.): Almost 70% of oil and gas midstream partnership Buckeye Partners' units are held by institutional investors, including several niche asset managers focused on the partnership space. It currently yields around 9% and has increased its distribution annually for 22 years.

But why is the yield so high? The answer is that Buckeye's leverage has been heading higher since roughly last October. And in the second quarter, distributable cash flow didn't cover the dividend, though the distribution was increased nonetheless. 

BPL Financial Debt to EBITDA (TTM) Chart

BPL Financial Debt to EBITDA (TTM) data by YCharts.

October 2016 is important because that's when the partnership announced its intention to buy a 50% stake in VITTI, expanding Buckeye's portfolio of storage assets in the Americas, Europe, the Middle East, and Asia. This $1.15 billion deal is big relative to Buckeye's $8 billion market cap. Investors are probably right to be a little worried, since Buckeye is also in the process of building assets, like pipelines, from the ground up. 

Buckeye has been here before, allowing distribution coverage to sink below 1 over the short term while it invests for the long term. When the cash flow from those investments started to flow, coverage improved and debt levels began to fall. With heavy institutional ownership, it looks like the smart money is betting that Buckeye does the same thing again. If you can handle a little uncertainty, you might want to tag along for the ride and the fat yield.

Don't let increased competition keep you away

Jason Hall (Verizon Communications): There's no doubt that wireless is becoming even more and more competitive, a fact that's affecting Verizon, whose subscriber count fell to start 2017 before adding 1.3 million net new retail connections in the second quarter. The company is also seeing average revenue per account fall as the price war for wireless subscribers continues. 

But these things shouldn't cause investors to skip it as an investment -- it didn't stop hedge fund D.E. Shaw from tripling its position to nearly 7 million shares worth over $400 million earlier this year. 

Why is Verizon a dividend stock to buy now? To start, it's still one of the most dominant wireless providers in the U.S., with the biggest and arguably the best network, even though the competition has narrowed the gap. But just because that gap has narrowed and Verizon is having to compete more on price than it ever has before doesn't make it a bad investment. To the contrary, its cash flows are still enormous, its dividend -- yielding 4.6% at recent prices -- is both generous and secure, and its scale should work in its favor for many years. It already helps the company generate far better returns and operating margins than its peers:

VZ Return on Invested Capital (TTM) Chart

VZ Return on Invested Capital (TTM) data by YCharts.

Trading for less than 13 times earnings, Verizon is also a fair value and maybe even cheap. Its growth prospects may be limited, the wireless business isn't going away, and Verizon has proven able to retain its customers while generating wonderful returns. It's a buy in my book. 

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Stocks Mentioned

Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
$51.64 (1.75%) $0.89
Buckeye Partners, L.P. Stock Quote
Buckeye Partners, L.P.
GameStop Corp. Stock Quote
GameStop Corp.
$123.42 (0.92%) $1.12

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