Despite these high-octane income stocks badly underperforming in the current bull market, billionaire money managers can’t get enough of them.
One of the greatest aspects of putting your money to work on Wall Street is that there’s more than one right answer. With thousands of publicly traded companies and exchange-traded funds (ETFs) to choose from, investors of all walks and risk tolerances are bound to find one or more securities that check all the appropriate boxes.
But among theses countless investment strategies, few have proved more effective over the long run than buying high-quality dividend stocks.
Last year, investment advisory firm Hartford Funds released a lengthy report (“The Power of Dividends: Past, Present, and Future”) extolling the many ways dividend stocks have run circles around their non-paying counterparts. This outperformance is particularly noticeable over long periods.
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According to Hartford Funds, in collaboration with Ned Davis Research, dividend-paying companies averaged a 9.17% annual return over the prior half century (1973-2023), and did so while being 6% less volatile than the broad-based S&P 500. Meanwhile, the non-payers delivered a less impressive 4.27% annualized return over 50 years and were 18% more volatile than the benchmark S&P 500.
But just because dividend stocks have, as a whole, outperformed, it doesn’t mean all income stocks have been stellar investments. A number of brand-name ultra-high-yield dividend stocks, whose yields are at least 4 times higher than the current yield of the S&P 500 (1.34%), have badly lagged in this bull market.
Nevertheless, the latest round of Form 13F filings, which detail buying and selling activity for Wall Street’s top money managers in the latest quarter, show that three underperforming, yet extremely well-known, ultra-high-yield dividend stocks were popular buys among billionaire investors.
Ford Motor Company: 5.71% yield
The first beaten-down ultra-high-yield dividend stock that billionaire money managers can’t stop buying is one of Detroit’s prized automakers, Ford Motor Company (F 2.00%). Ford and its outsize yield, which is approaching 6%, attracted four billionaire buyers during the second quarter, including (total shares purchased in parenthesis):
- Ole Andreas Halvorsen of Viking Global Investors (18,789,638 shares)
- Ken Fisher of Fisher Asset Management (4,825,153 shares)
- Jeff Yass of Susquehanna International (3,645,709 shares)
- Cliff Asness of AQR Capital Management (2,497,695 shares)
Despite all three major stock indexes hitting new record-closing highs in July, shares of Ford reversed to three-year lows in recent weeks. The culprit was the company’s guidance, which has been tarnished by higher costs tied to recalls and steep losses expected from its Model e operating segment. This is the division responsible for its electric vehicles (EVs).
The good news for Ford is that it has the ability to pull levers and readjust its focus off of EVs, if that’s where consumer interest lies. Last year, Ford announced plans to postpone $12 billion in cumulative spending on EVs, which isn’t a drop in the bucket. If focusing on internal-combustion engine (ICE) vehicles, which are highly profitable for Ford, is what customers want, management will happily oblige.
Don’t overlook that Ford’s F-Series pickup has been the top-selling truck in the U.S. for 47 consecutive years, and the top-selling vehicle of any kind in this country for 42 straight years. In the auto industry, size tends to matter — larger trucks typically generate better margins for automakers than smaller sedans. The continued dominance of the F-Series is critical to Ford’s profitability.
Billionaires might also be comforted by Ford’s relatively solid capital position (more than $34 billion in cash, cash equivalents, and marketable securities) and the company increasing its adjusted free-cash-flow guidance for 2024.
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Walgreens Boots Alliance: 9.24% yield
A second struggling but extremely well-known ultra-high-yield dividend stock that billionaire money managers can’t stop buying is pharmacy chain Walgreens Boots Alliance (WBA -0.64%). The June-ended quarter saw three top-tier billionaires buy shares of Walgreens, including (total shares purchased in parenthesis):
- Ken Griffin of Citadel Advisors (608,979 shares)
- Jeff Yass of Susquehanna International (380,334 shares)
- Steven Cohen of Point72 Asset Management (323,532 shares)
With shares of Walgreens Boots Alliance down a staggering 78% over the trailing-five-year period, its yield has shot up to north of 9%. This vast underperformance for Walgreens can be attributed to increasing competitive pressure from online pharmacies, as well as poor early returns from its shift toward healthcare services, which included a whopper of a writedown earlier this year.
Perhaps the saving grace for Walgreens is its new CEO, Tim Wentworth, who has decades of experience as a leader in the healthcare sector. Prior CEO Rosalind Brewer had a lengthy background in retail but no prior healthcare experience, and it’s put Walgreens in a disadvantageous competitive position. Although Wentworth’s ripping-off-the-bandage tactics can be painful at times, such as announcing the closure of a notable percentage of underperforming stores, they’re a necessity for Walgreens to complete its turnaround.
One part of Wentworth’s turnaround proposal includes tightening the company’s belt. Closing underperforming stores and selling non-core assets is a means to raise capital, reduce debt, and provide the company with more financial flexibility.
But he also understands that Walgreens will have to invest for the future and evolve. This includes investing in digitization for its supply chain, promoting direct-to-consumer sales, and building out its healthcare services network in markets where it makes financial sense to do so.
It won’t be a quick turnaround, but Walgreens has the puzzle pieces in place to make it happen.
AT&T: 5.81% yield
The third brand-name ultra-high-yield dividend stock that billionaire investors have been eagerly piling into is telecom titan AT&T (T 0.78%). Despite AT&T underperforming in the current bull market, five prominent billionaires were avid buyers in the second quarter, including (total shares purchased in parenthesis):
- Ken Griffin of Citadel Advisors (7,360,132 shares)
- Cliff Asness of AQR Capital Management (6,602,586 shares)
- Ray Dalio of Bridgewater Associates (307,912 shares)
- John Overdeck and David Siegel of Two Sigma Investments (96,400 shares)
AT&T’s woes hit a crescendo last summer when The Wall Street Journal released a report alleging it and other legacy telecom companies could face steep cleanup costs and health-related liabilities tied to their use of lead-sheathed cables. Although AT&T refuted the WSJ‘s findings, and any future liabilities (should there be any) would likely be determined in the notoriously slow U.S. court system, the climb back for AT&T’s stock has been slow.
On the bright side, AT&T’s investments in its network are paying off. Wireless users are consuming more high-margin data, and the company’s postpaid churn rate is at a historically low 0.7%. In other words, the company’s cash flow has been highly predictable.
Furthermore, upgrading its network to support 5G download speeds has been a major boost to its broadband operations. Broadband may not be the growth story it was at the start of this century, but it’s still a source of predictable operating cash flow and is often the dangling carrot AT&T can use to encourage residential customers to bundle their services.
However, the primary lure for billionaires might just be AT&T’s markedly improved balance sheet. Since spinning off content arm WarnerMedia, the company’s net debt has declined from $169 billion on March 30, 2022, to $126.9 billion, as of June 30, 2024. AT&T should have no trouble maintaining its nearly 6% payout.