You may not realize it, but Monday, May 15, marked one of the most important data releases of the entire quarter. Amid the seemingly never-ending slew of earnings reports and economic data, May 15 was the Form 13F filing deadline for institutional money managers with the Securities and Exchange Commission.
A 13F is a required filing for fund managers with at least $100 million in assets under management that provides a snapshot of what they bought, sold, and held in the most recent quarter (in this case, the first quarter). Despite being up to 45 days old when filed, these snapshots provide insight into what stocks and trends are of interest to some of the smartest and most-successful investors on Wall Street.
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One trend that definitely stands out from the first quarter is billionaire investors buying dividend stocks. Companies that pay a dividend tend to be profitable, time-tested, and have clear long-term outlooks. Most importantly, income stocks have an extensive history of long-term outperformance.
But it wasn't just your run-of-the-mill income stocks that billionaire money managers purchased in the first quarter. Based on 13F filings, billionaires couldn't stop buying three ultra-high-yield dividend stocks, with yields ranging from 7.2% to 13.6%.
Annaly Capital Management: 13.6% yield
The first supercharged income stock that's been piquing the interest of billionaire fund managers is mortgage real estate investment trust (REIT) Annaly Capital Management (NLY 0.73%). REITs avoid normal corporate tax rates by returning most of their operating profits to their shareholders in the form of a dividend, which is why Annaly's yield of 13.6% is so high.
During the March-ended quarter, two notable billionaires stepped up as buyers. Israel Englander's Millennium Management purchased 1.33 million shares, while Jim Simons' Renaissance Technologies opened a position with a buy totaling close to 357,000 shares.
NYSE: NLY
Key Data Points
The goal for REITs is to purchase property or assets that generate yields/returns that are higher than the interest rate on the capital they've borrowed. Annaly attempts to borrow money at low short-term lending rates and uses this capital to purchase higher-yielding mortgage-backed securities. The difference in yield between what Annaly generates on its owned assets minus its average borrow rate is known as net interest margin.
To be perfectly blunt, things couldn't be worse for mortgage REITs at the moment. The Federal Reserve hiked interest rates at the fastest pace in decades, which sent short-term borrowing costs soaring. At the same time, the Treasury yield curve has inverted, which means bonds with shorter maturities have higher yields than those maturing 10 or 30 years from now. These are all scenarios for declining book value and lower net interest margin.
However, history may be on Annaly Capital Management's side. Although we're witnessing some jaw-dropping yield-curve inversions at the moment, the yield curve spends a disproportionate amount of time sloped up and to the right (i.e., with longer-dated bonds sporting higher yields than short-term notes). Englander and Simons might be anticipating this return to normalcy in the coming years, which should lead to an expansion of Annaly's net interest margin.
What's more, Annaly Capital Management predominantly invests in agency securities. "Agency" assets are backed by the federal government in the event of default. This level of protection has historically allowed Annaly to prudently lever its bets (when it makes sense to do so) in order to increase its profits.
NYSE: MO
Key Data Points
Altria Group: 8.34% yield
A second ultra-high-yield dividend stock billionaires can't stop buying is Altria Group (MO +0.34%), the tobacco giant behind the exceptionally popular Marlboro brand in the United States. Altria is doling out an 8.3% yield and its management team is targeting mid-single-digit dividend growth through 2028.
Similar to Annaly, two recognized billionaires stepped up the plate to buy shares of Altria in the first quarter. This includes Ken Griffin of Citadel Advisors, who more than doubled his fund's stake with a 1.1-million-share purchase, and Steven Cohen of Point72 Asset Management, who opened a roughly 885,100-share position.
Although the growth heyday for tobacco stocks is long gone, giants like Altria Group still offer competitive advantages that attract tenured money managers like Griffin and Cohen. For instance, tobacco stocks usually have exceptional pricing power. Given the addictive nature of the nicotine found in tobacco products, consumers have shown a willingness to absorb significant price increases to continue their habit.
Another potentially exciting development for Altria Group is its $2.75 billion acquisition of e-cigarette company NJOY, which was announced in March 2023. Altria's equity stake in the once high-flying Juul Labs didn't work out as planned, with numerous lawsuits filed against Juul and ongoing scrutiny from regulators over its products. Buying NJOY removes these proverbial clouds of uncertainty given that NJOY has received U.S. Food and Drug Administration approval for six products. Altria is very clearly not messing around when it comes to expanding its portfolio beyond smokeable products.
Additionally, Altria's management team understands that the company is well past its significant growth phase and attempts to reward patient shareholders when and where it can. Since the start of 2021, the company has repurchased $3.5 billion worth of its common stock and has pledged to buy back $1 billion more before the end of this year. A reduced outstanding share count can have a positive impact on earnings per share for businesses with steady or growing net income, like Altria.
Image source: Getty Images.
Verizon Communications: 7.22% yield
The third ultra-high-yield dividend stock that billionaires can't stop buying is telecom company Verizon Communications (VZ +1.43%). With the exception of a short period in May-June 2010, Verizon's current yield of 7.2% has never been higher.
Keeping with the theme, two billionaires were active buyers of Verizon stock during the first quarter. Jeff Yass's Susquehanna International more than doubled its existing stake by purchasing approximately 3.23 million shares, while Israel Englander of Millennium scooped up an additional 1.14 million shares for his fund.
The beauty of telecom stocks tends to be the predictability of their cash flow. Regardless of how well or poorly the U.S. economy performs, there are certain goods and services consumers have demonstrated an unwillingness to give up. Smartphones, along with wireless and internet access, tend to fit the mold. Ongoing low churn rates for Verizon and its peers suggest steady cash flow will continue, even if a U.S. recession materializes, as the Federal Reserve has predicted will occur later this year.
NYSE: VZ
Key Data Points
Beyond just providing a basic necessity service, Verizon should enjoy an organic growth lift from two key catalysts. The first and most obvious is the 5G revolution. After waiting a decade for wireless infrastructure to be upgraded to support faster download speeds (i.e., move from 4G to 5G), consumers and businesses should be eager to replace their devices. This replacement cycle should last for years and result in a substantial uptick in data consumption, which is a positive for Verizon's wireless operating margin.
The lesser-known catalyst for Verizon that should be raising eyebrows is its resurgence in broadband growth. In 2021, Verizon spent nearly $53 billion to acquire C-band spectrum, with one of the purposes being to offer 5G broadband to as many as 50 million homes and 14 million businesses by 2025. This looks to be a smart investment, with broadband net additions of 437,000 in the first quarter representing its top quarter for net additions in more than a decade.
Valued at just 8 times current and forward-year consensus earnings, Verizon's risk-versus-reward looks favorable for patient, income-seeking investors.
