For much of the past decade, growth stocks have ruled the roost. With interest rates on a precipitous decline, it's allowed fast-paced companies to borrow cheaply in order to hire, innovate, acquire, and expand.
At the same time, the past decade has not been as much fun for income-seeking investors. When lending rates drop, yields follow. In many instances, Treasury bond buyers are going to struggle to outpace inflation with their nominal yields.
The solution? Dividend stocks.
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Billionaire investors are fancying high-yield dividend plays
Over long periods of time, dividend stocks have run circles around non-dividend-paying companies. A quality payout also acts as a beacon to alert investors of a profitable and often time-tested company.
The biggest issue when it comes to dividend stocks is balancing yield with risk. In an ideal world, income seekers would purchase a high-yielding stock with minimal risk. Unfortunately, history shows that yield and risk tend to be correlated, once you get into the high-yield category (north of 4%). Since yield is simply a function of payout relative to price, a struggling or failing business with a plunging share price can falsely give off the impression to investors that it's a money machine. In other words, investors need to be extra vigilant when buying high-yielding dividend stocks.
But what you might not realize is that billionaire money managers are doing this hard work for us. Eager to find ways to generate a return on their capital, billionaires have not been shy about piling into high-yield dividend stocks of late. According to fourth-quarter 13F filings with the Securities and Exchange Commission, courtesy of 13F aggregator WhaleWisdom.com, they can't stop buying the following three well-known income stocks.
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AT&T: 6.9% yield
To begin with, billionaire money managers are fans of low-volatility telecom companies. AT&T (T 0.88%) and its nearly 7% yield has been particularly popular. Even though aggregate share ownership in the company only increased fractionally in the fourth quarter (Q4) from the sequential third quarter, we saw billionaire Jeff Yass of Susquehanna International and Larry Fink of BlackRockrespectively add 4.33 million shares and 3.67 million shares to their existing positions.
Though the growth heyday for AT&T is long gone, it's still a company that generates boatloads of highly predictable cash flow. It also has catalysts in the offing that should be able to move the profit needle in the right direction over time. For instance, the rollout of 5G networks will provide the first opportunity for consumers and businesses to upgrade their wireless download speeds in a decade. You can bet that customers will jumping at that opportunity. Since data is where AT&T generates its juiciest wireless margins, we'd expect faster download speeds to eventually expand the company's wireless operating margin.
AT&T is beginning to find streaming traction, as well. Following a subdued launch to HBO Max in late May, the streaming service delivered a doubling in subscriber count during Q4 to 17.2 million. This may well have to do with subsidiary WarnerMedia releasing its new films on HBO Max in 2021 the same day they're slated to hit movie theaters.
With management repeatedly emphasizing the safety of its dividend, income investors can count on AT&T and its superior yield.
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Annaly Capital Management: 10% yield
Billionaire money managers have also wisely gravitated to mortgage real estate investment trust (REIT) Annaly Capital Management (NLY 0.10%). Despite aggregate ownership among 13F filers inching up only 0.5% in Q4 from the sequential quarter, it's the 6.16-million-share buy from BlackRock and the 2.11-million-share purchase from John Overdeck's and David Siegel's Two Sigma Investments that really stands out.
Put simply, a mortgage REIT is a business that borrows money at short-term lending rates and acquires assets that provide a higher long-term yield. The difference between the yield received and the borrowing rate is known as net interest margin (NIM). For mortgage REITs likely Annaly, we're entering the juiciest portion of their growth phase (i.e., where NIM widens). As the yield curve steepens during the early stages of an economic recovery, Annaly is usually able to pick up mortgage-backed securities (MBS) that have solid long-term yields, all while short-term borrowing rates remain low.
Another key to Annaly's success is the composition of its asset portfolio. Annaly almost exclusively focuses on agency MBSs and to-be-announced (TBA) securities. The point being that agency assets are backed in the event of default by the federal government. Though agency yields are lower than non-agency yields, this added protection allows Annaly to safely increase its leverage and pump up its operating income.
Having averaged something close to a 12% yield over the past decade, its current 10% yield is highly sustainable.
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AbbVie: 5% yield
Billionaires have also had an insatiable appetite for pharmaceutical stock AbbVie (ABBV -0.95%). Even with aggregate 13F ownership falling fractionally in the fourth quarter, we saw Warren Buffett's Berkshire Hathawaybuy 4.27 million shares, BlackRock add 2.41 million shares, and Ken Griffin's Citadel Advisors scoop up just over 786,000 shares.
The promise and peril of AbbVie has always been its top-selling drug, Humira. The world's best-selling therapy brought in $19.8 billion last year, which accounted for 43.3% of AbbVie's total sales. That's actually down from where things stood a few years ago.
The thing about Humira is that it still has two years before it'll face any biosimilar competition in the U.S., and it's such a well-known brand-name drug that it's unlikely to fall off the map with consumers or physicians, even after competing anti-inflammatory treatments make their debut in 2023. Translation: Humira can remain a cash cow for AbbVie and support this premier 5% yield.
AbbVie has also looked for ways to diversify its revenue stream beyond Humira. The 2015 deal to acquire Pharmacyclics added a blockbuster hematological cancer drug in Imbruvica. Meanwhile, in May 2020, it closed on its deal to buy Allergan, which added new therapeutic sales channels, boosted global distribution, and is expected to result in over $2 billion in cost synergies by the third year, post-merger.
Since healthcare stocks are highly defensive plays -- patients need drugs and medical devices no matter how well or poorly the economy is performing -- billionaires view AbbVie as a safe bet to deliver above-average income.
Sean Williams owns shares of AT&T. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and recommends the following options: short January 2023 $200 puts on Berkshire Hathaway (B shares) and long January 2023 $200 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.
