Some people see the S&P 500 index reach new heights and worry they're missing out while others worry there's a crash around the corner. Whichever camp you're in, buying more dividend-paying stocks is probably the surest way to build a portfolio that can outperform over time.
Dividend-payers as a class tend to outperform non-payers because these companies are already profitable on a recurring basis. Plus, a commitment to distribute a portion of profits forces managers to think further ahead and exercise more care when directing limited cash flows.
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The difference between dividend payers and non-payers is probably more dramatic than you think. According to a study conducted by Ned Davis Research and Hartford Funds, during the 50 years between 1973 and 2022, shares of dividend-paying stocks in the S&P 500 index delivered a 9.18% average annual return. Shares of the index's non-payers returned just 3.95% per year over the same time frame.
These two dividend payers offer an average yield of about 12.65% at their recent share prices -- more than 9 times the average yield of stocks in the S&P 500 index.
Medical Properties Trust
One of the more surprising ultra-high-yield dividend stocks that had billionaire investors mashing the buy button in the fourth quarter was Medical Properties Trust (MPW -1.10%). The real estate investment trust (REIT) owns over 400 hospitals and related facilities in the U.S. and eight other countries.
At recent prices, Medical Properties Trust offers a 15.6% yield. Its generally reliable business model and that huge dividend yield enticed more than a few billionaire asset managers to pick up shares in the fourth quarter, including:
- Israel Englander of Millennium Management (2,342,460 shares)
- Jeff Yass of Susquehanna International Group (1,762,020 shares)
- Ken Griffen of Citadel Advisors (1,374,795 shares)
- Philippe Laffont of Coatue Management (1,060,830 shares)
Medical Properties Trust isn't just geographically diversified. Its properties are managed by 54 different operators. Cash flows should be reliable because the REIT gets nearly all its building operators to sign long-term net leases that transfer all the variable costs of building ownership, such as maintenance and taxes, to the tenant.
Hospital demand is generally reliable, but Medical Properties Trust had to slash its dividend last year because its biggest tenant, Steward Health Care, has been missing rent payments. Recent asset sales will help Medical Properties Trust meet its dividend obligation over the next several quarters. Looking further ahead, though, this stock remains a risky pick. The REIT still relies on Steward for more than 20% of total revenues.
The billionaires mentioned above may have bought millions of shares of this REIT in the fourth quarter, but it still accounted for only small portions of their well-diversified portfolios. If you're going to take a chance with this stock, be sure to follow their lead.
British American Tobacco
Billionaires were also attracted to tobacco stocks late last year. Well-known money managers who increased their bets on British American Tobacco (BTI -0.51%) in the fourth quarter included Ken Griffin of Citadel Advisors, who acquired 618,331 shares, and Jeff Yass of Susquehanna International Group, who acquired 204,691 shares.
At recent prices, British American Tobacco shares offer a 9.7% dividend yield. That's a lower yield than Medical Properties Trust, but the tobacco giant offers far more stability. Traditional cigarette sales have been declining for decades, but the total amount of nicotine being consumed is holding steady.
Shares of British American Tobacco have been under a lot of pressure ever since it wrote down the value of its cigarette brands last year by about $31 billion. Luckily for shareholders, the company's non-combustible portfolio grew sales by 15.6% in 2023. Adjusted for foreign currency fluctuations, total revenue rose 1.6%.
By 2035, British American Tobacco expects a majority of its revenue to come from non-combustible products, such as Vuse, its e-cigarette brand. Vuse sales in the U.S. market are growing fast and could keep rising at a rapid pace. It's one of just three brands of vape the Food and Drug Administration currently allows U.S. retailers to sell.
