With thousands of publicly traded companies vying for Wall Street's attention, there's a multitude of strategies that can make long-term investors richer. But few strategies have been more successful in generating outsized returns over the long run than buying dividend stocks.
Companies that pay a regular dividend to their shareholders are usually profitable on a recurring basis and time-tested. These are businesses that have demonstrated their ability to navigate challenging economic climates and come out stronger on the other side. In short, they're the type of businesses we'd expect to increase in value over time -- and that's exactly what the data shows.
According to a 2013 report from the wealth management division of JPMorgan Chase, companies that initiated and grew their payouts between 1972 and 2012 averaged a hearty 9.5% annualized return over this four-decade stretch. Meanwhile, non-payers crawled to an annualized return of 1.6% over the same span.
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This outperformance isn't lost on Wall Street's top money managers. Based on the latest round of Form 13F filings, billionaire investors were avid purchasers of dividend stocks in the September-ended quarter.
In particular, there are three ultra-high-yield dividend stocks (public companies with yields four or more times higher than the S&P 500) billionaires can't stop buying.
AT&T: 6.98% yield
The first supercharged income stock that was high on the buy list for a handful of billionaire investors is telecom stock AT&T (T 1.02%). Despite a disappointing year-to-date performance for AT&T stock, its shares were scooped up by four billionaires, including (total shares purchased in parenthesis):
- Ken Griffin of Citadel Advisors (13,721,964 shares).
- John Overdeck and David Siegel of Two Sigma Investments (8,561,938 shares).
- Jeff Yass of Susquehanna International (7,593,408 shares).
There are two reasons AT&T's shares have been under pressure this year. The first is rapidly rising interest rates. Since telecom companies carry a lot of debt, future deals and refinancing could be considerably costlier.
The other concern is a July report from The Wall Street Journal that suggested lead-clad cables still in use by legacy telecom companies may lead to significant replacement costs and liability expenses.
Though these concerns shouldn't be swept under the rug, Wall Street's brightest investments minds realize they aren't game changers for AT&T. For example, any liability for lead-sheathed cables would be determined by the U.S. court system, which would almost certainly take years. Furthermore, AT&T has seen no evidence that its legacy lead-clad cables present a health hazard to its workers or the environment.
Additionally, AT&T's balance sheet has markedly improved since the company spun off WarnerMedia in April 2022. When WarnerMedia merged with Discovery to create Warner Bros. Discovery, this new media entity took ownership of certain debt lots that had previously been held by AT&T. In an 18-month stretch between March 31, 2022, and Sept. 30, 2023, AT&T's net debt declined from $169 billion to $128.7 billion. Added financial flexibility ensures that AT&T's outsized yield is sustainable.
Most importantly, the 5G revolution is working in AT&T's favor. Wireless users are incented to consume more data with faster download speeds. Meanwhile, AT&T is working on what could be a sixth consecutive year with more than 1 million net-broadband additions.
Altria Group: 9.6% yield
A second ultra-high-yield stock billionaire money managers can't stop buying is tobacco behemoth Altria Group (MO -0.37%). Three prominent billionaires added to their funds' existing stakes during the third quarter, including (total shares purchased in parenthesis):
- Steven Cohen of Point72 Asset Management (991,743 shares).
- Israel Englander of Millennium Management (941,022 shares).
- Ray Dalio of Bridgewater Associates (129,160 shares).
The challenge for Altria is that the American public has become increasingly aware of the potential long-term, negative health effects of using tobacco products. Since the mid-1960s, the adult cigarette-smoking rate in the U.S. has plunged from around 42% to just 11.5% as of 2021, according to the Centers for Disease Control and Prevention. The end result has been a fairly steady decline in cigarette shipments.
Though this might sound like a dagger to Altria's operating model, three aforementioned billionaires don't see it that way.
To start with, Altria possesses exceptional pricing power. Tobacco products contain nicotine, which is an addictive chemical. Altria has, thus far, been able to more than offset shipment declines and inflationary pressures with price increases.
To add, Altria is the company behind the market-leading premium cigarette brand Marlboro. Through the first nine months of 2023, Marlboro has held a greater-than 42% share of the cigarette market. Such a massive share from one brand all but ensures Altria's ability to pass along inflation-topping price hikes.
Another reason Altria may be attracting a lot of attention from billionaire money managers is its acquisition of electronic-vapor company NJOY Holdings, which closed in early June. NJOY has received six marketing-granted orders (MGOs) for its e-vapor products and devices. Meanwhile, the vast majority of its e-vapor competitors lack MGOs. This means Altria's products will stay on store shelves, while non-MGO products could be removed in the future.
With a nearly 10% yield, Altria is a stable-income powerhouse in an uncertain economic climate.
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AGNC Investment: 16.55% yield
The third ultra-high-yield dividend stock billionaires can't stop buying is mortgage real estate investment trust (REIT) AGNC Investment (AGNC 0.97%). This monthly dividend stock, with a jaw-dropping 16.6% yield, was purchased by four billionaires during the third quarter, including (total shares purchased in parenthesis):
- Jeff Yass of Susquehanna International (1,375,629 shares).
- John Overdeck and David Siegel of Two Sigma Investments (1,153,151 shares).
- Israel Englander of Millennium Management (661,572 shares).
Few industries have been as universally disliked in recent years as mortgage REITs. That's because mortgage REITs are highly sensitive to changes in interest rates. The fastest pace of rate hikes in four decades has rapidly increased short-term borrowing costs for companies like AGNC and driven down their book value and net-interest margin (NIM) -- i.e., the average yield on the company's owned assets less its average borrowing rate.
However, it's unlikely we would see prominent billionaire investors increasing their funds' stakes in AGNC Investment if they didn't see light at the end of the tunnel.
Even though mortgage REITs benefit from lower interest rate environments, there's still a bright side to rising rates. Specifically, it'll gradually increase the average yield on the mortgage-backed securities (MBS) AGNC owns. As its average yield rises with new MBS purchases, the expectation would be for AGNC's NIM to also expand.
Furthermore, the Federal Reserve is no longer purchasing MBS as it continues with its quantitative tightening measures. With a big MBS buyer out of the picture, AGNC should be able to land higher-yielding MBS.
Lastly, AGNC almost exclusively purchases agency assets, with $55.9 billion of its $59.3 billion investment portfolio tied up in Agency MBS. "Agency" securities are backed by the federal government in the event of default. It's this added protection that gives AGNC's management the confidence to lever its investments in order to maximize its profit potential.
