By The Sizemore Letter
With the 10-year Treasury yield hitting new multi-year highs and all dividend-focused stock taking a beating as a result, income investors can be forgiven for feeling a little uneasy at the moment. It’s unsettling to buy a REIT, MLPs or dividend-paying stock in the hopes of enjoying a nice 4-5% yield only to lose two or three times that much due to price declines.
During times of turbulence, it can be helpful to take a peek over the shoulder of a successful investor you respect to see how they are reacting. You shouldn’t mindlessly ape what they are doing, of course. But following their trading moves can give you a sense of perspective.
With that in mind, let’s take a look at three investment gurus to see what dividend-focused investments they are buying—or perhaps not buying.
No guru list is complete without a mention of the Sage of Omaha, so I’ll start with Warren Buffett. I wrote a short piece last week outlining some of Buffett’s recent purchases, though most of the comments centered around non-dividend paying companies such as Dish Networks (DISH).
Interestingly, none of Buffett’s major new additions are “dividend focused,” per se. Suncor Energy (SU), one of his larger new holdings, pays a modest 2.3%.
Perhaps his most promising dividend payer is his old standby—Wells Fargo & Company (WFC). Buffett has owned Wells Fargo for years, and it is currently the largest single holding in his portfolio. He’s been adding to the position throughout 2013, and he snapped up nearly 5 million shares last quarter.
Wells Fargo may seem an odd choice as a “dividend stock,” given that the company yields only 2.5%. Like most banks, Wells Fargo slashed its dividend during the crisis to conserve capital. Yet since 2011, Wells Fargo has been aggressively raising its dividend, from a $0.05 per quarter in February of that year to $0.30 per quarter today. The dividend is now nearly back to pre-crisis levels.
We can’t expect the dividend to rise by a factor of six again over the next two years; those sorts of jumps only happen when you take those first steps out of crisis. But I do expect the bank to deliver better than average dividend growth for the next several years.
Next on the list is one of my favorite value managers, David Dreman. If you’re not familiar with Dreman, you should be. He wrote the book on contrarian investing, and I mean that literally. His Contrarian Investment Strategies is a classic any serious investor should have in their library. He’s also a regular contributor to Forbes.
So, what has Mr. Dreman been buying?
One position that caught my eye is Mack-Cali Realty Corp (CLI), a real estate investment trust specializing in office and light industrial properties.
REITs have gotten pounded in the recent “taper” turbulence, and Mack-Cali is no exception. In the past three months, the stock has lost a quarter of its value. But as the consummate contrarian, Dreman appears to view the sell-off as an opportunity.
In looking at Dreman’s portfolio, it is clear that he does not take large, overweighted positions, and his overall investment in Mack-Cali is fairly modest. Still, it is telling that he is buying REITs at all given the recent volatility in their share prices.
At current prices, Mack-Cali yields a juicy 5.6%. Though disturbingly, the dividend was recently cut by a third. I like David Dreman, and recommend you read his books. But as a general rule, I don’t like to buy REITs with falling dividends. In fact, I like to see a long track record of growing dividends. I would gladly take a Realty Income (O) or a National Retail Properties (NNN) over Mack-Cali.
Speaking of Realty Income, I noticed that my favorite REIT recently popped up in the portfolio of quantitative hedge fund legend Jim Simons, the CEO of Renaissance Technologies.
Renaissance Technologies returns over the years have been mind-blowing. If fact, if I hadn’t already been familiar with Simons, I would have assumed his returns were bogus. They seem too good to be true. Simons’ Medallion fund became the stuff of legends by generating annual returns in excess of 35%since 1988…and that was after the fund’s hefty fees were taken out.
Renaissance Technologies added shares of Realty Income in the second quarter. Given Renaissance Technologies’ fast-moving trading style, it’s possible that they already liquidated the position. Still, other gurus have been snapping up shares as well, including Ray Dalio and Steven Cohen.
Because of Realty Income’s position as a “bond substitute,” its share price has been hit particularly hard among REITs. The same is true for its peers in the conservative triple-net retail sector. But at current prices, Realty Income yields 5.4% And I should emphasize that this is one of the most consistent dividend payers (and serial raisers) you can find on any stock exchange in the world. This is a REIT that skated through the 2008 meltdown with nary a scratch.
I suspect that were I to write this article next quarter, I might find quite a few new smart money gurus among its owners.
Disclosures: Sizemore Capital is long O and NNN.
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