There is no one-size-fits-all strategy to build wealth on Wall Street. However, there are strategies that seemingly offer higher rates of long-term success than others. Buying dividend stocks and holding them over long periods has, historically, been one of the smartest moves investors can make.
In 2013, the wealth management division of money-center bank JPMorgan Chase released the results of a study that compared the annualized returns over 40 years (1972-2012) of publicly traded companies that initiated and grew their payouts to those of public companies that didn't offer a dividend. The comparison between these two groupings was night and day.
Over the four-decade stretch examined, the dividend stocks produced an annualized return of 9.5%. That compared to a meager 1.6% annualized return over the same span for the companies not offering a payout.
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Since dividend stocks are almost always profitable on a recurring basis, and they generally have well-defined long-term growth outlooks, their long-term outperformance shouldn't be much of a surprise.
What is shocking is seeing how billionaire money managers have approached investing in dividend stocks of late -- in particular, ultra-high-yield stocks, which is a term I like to use to describe companies with yields of 7% or above.
The latest round of 13F filings show that billionaires absolutely piled into one supercharged income stock during the second quarter, while at the same time rushing for the exit from two other ultra-high-yield dividend stocks.
The ultra-high-yield dividend stock billionaires are piling into: AT&T (7.9% yield)
Despite its abysmal year-to-date performance (down 24%), telecom stock AT&T (T 1.02%) has been nothing short of a favorite among billionaire investors seeking supercharged dividend income. Based on recently filed 13Fs, five billionaires were buyers of AT&T stock, including (number of shares purchased in Q2 in parentheses):
- Jim Simons of Renaissance Technologies (5,798,117 shares)
- John Overdeck and David Siegel of Two Sigma Investments (3,499,645 shares)
- Jeff Yass of Susquehanna International (2,475,430 shares)
- Ray Dalio of Bridgewater Associates (1,982,375 shares)
Since yield is a function of payout relative to share price, the poor performance of AT&T's stock is primarily why its yield is at nearly 8%. Although concerns persist about AT&T's debt load in a rising interest rate environment, much of the recent weakness in the company's share price is tied to a report by The Wall Street Journal regarding its legacy use of lead-sheathed cables. Some analysts have thrown out some very large financial liability figures for the telecom industry to replace these lead-clad cables.
While this isn't an issue that should be completely dismissed, lead-sheathing isn't the game changer it's being made out to be for AT&T, either. Aside from the fact that these legacy cables make up a small percentage of AT&T's network, it's not even clear if AT&T has any financial liability tied to their use. And even if the company does have financial liability, it'll take years in the court system for that to be determined.
What's far more important to recognize is that, thanks to 5G, AT&T's needle is moving the right direction. An ongoing device replacement cycle is increasing wireless data consumption, which should help improve the company's operating margin. Meanwhile, faster download speeds have provided a nice lift to the company's broadband segment. AT&T Fiber is working on a five-year streak of at least 1 million net broadband additions.
Billionaires are probably also enamored with AT&T's valuation. At less than 6 times current- and forward-year consensus earnings per share, there appears to be limited downside to go along with this nearly 8% yield.
Ultra-high-yield dividend stock No. 1 billionaires are selling: Altria Group (8.76% yield)
However, not all high-octane dividend stocks are being viewed favorably by Wall Street's most prominent billionaire money managers. One primo income stock that was a popular sell by billionaires in the second quarter is tobacco giant Altria Group (MO -0.37%). Its billionaire sellers include (number of shares sold in Q2 in parentheses):
- Ken Griffin at Citadel Advisors (2,090,053 shares)
- Steven Cohen at Point72 Asset Management (752,115 shares)
- Israel Englander at Millennium Management (244,384 shares)
The likeliest reason we're seeing billionaires head for the exit is Altria's declining cigarette shipment volume. As public knowledge of the potentially negative long-term health effects of smoking tobacco products has evolved, adult smoking rates in the U.S. have dropped from 42% in the mid-1960s to just 11.5%, as of 2021. It's tough to grow earnings when shipment volume in the U.S. is regularly declining.
The other red mark for Altria has been its unsuccessful equity investments. In December 2018, Altria announced a mammoth $12.8 billion minority investment in vaping company JUUL. But due to myriad issues concerning JUUL's marketing, the value of Altria's investment had declined by well over 90%, as of the end of 2022.
It's a similar story with Altria's $1.8 billion equity stake in Canadian marijuana stock Cronos Group. With the U.S. federal government unwilling to legalize cannabis at this time, Canadian licensed producers have struggled. Altria's equity stake is down more than 80% from the first quarter of 2019.
But one factor Altria Group does have working in its favor is its pricing power. Since tobacco contains nicotine, an addictive chemical, existing users have been willing to accept price hikes. The ability to raise prices on its tobacco products, coupled with a very shareholder-friendly capital-return program, is a strategy that can still deliver modest returns to patient investors.
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Ultra-high-yield dividend stock No. 2 billionaires are selling: Annaly Capital Management (13.61% yield)
The other ultra-high-yield dividend stock billionaires have been big-time sellers of is mortgage real estate investment trust (REIT) Annaly Capital Management (NLY 1.02%). Despite its mammoth 13.6% yield, three successful billionaire investors were busy pressing the sell button in the second quarter, including (number of shares sold in Q2 in parentheses):
- Israel Englander of Millennium Management (1,345,778 shares)
- Jim Simons of Renaissance Technologies (331,579 shares)
- Jeff Yass of Susquehanna International (186,786 shares)
Mortgage REITs like Annaly are highly interest-sensitive. They make their living by borrowing money at low short-term lending rates and using this capital to purchase higher-yielding long-term assets, such as mortgage-backed securities (MBS). The wider the gap (known as "net interest margin") between the yield on assets owned less the average yield on borrowed capital, the more profitable a mortgage REIT like Annaly can be.
There look to be two reasons why billionaires have rushed for the exit with Annaly Capital Management. The first is the sustained inversion of the Treasury yield curve. With short-term borrowing rates skyrocketing, Annaly's net interest margin and book value have shrunk.
The other issue is the pace of the Federal Reserve's rate hikes. Although mortgage REITs prefer a low-rate environment, companies like Annaly can still thrive if the U.S.'s central bank is careful with its monetary policy. However, the fastest rate-hiking cycle in more than 40 years hasn't given Annaly much time to reposition, which has led to its poor performance.
The light at the end of the tunnel for optimists is that the Treasury yield curve spends most of its time sloped up and to the right. In other words, longer-maturing bonds have higher yields than short-term bills. An eventual normalization of the yield curve should perk up Annaly's net interest margin.
Furthermore, $71.4 billion of the company's $78.9 billion investment portfolio is tied up in highly liquid agency securities. An "agency" asset is backed by the federal government in the event of default. This added protection allows Annaly Capital Management to prudently lever its portfolio and maximize its profit potential.
