There have been a number of tough investment times over the past quarter century, including the dot-com bubble, the financial crisis and the coronavirus crash. However, none have been as brutal as bear market investors are currently enduring. The bond market is in the midst of its worst year alreadywhile the reference S&P500 achieved their worst first-half comeback in more than half a century.
While bear market declines can be disconcerting, especially to new investors, they have long represented opportunities for successful fund managers to deploy their capital. For much of 2022, billionaire fund managers have been actively putting money to work in the stock market.
Perhaps most intriguing is that some billionaires have aggressively increased existing positions in ultra-high yielding dividend stocks. (“Ultra-high-yield” is an arbitrary term I use for income stocks with yields of at least 7%.) Because dividend stocks are generally profitable and time-tested, they can be smart buys during a bear market.
What follows are three ultra-high yielding dividend stocks with yields above 8% that billionaires love.
AGNC investment: return of 18.2%
The first passive income powerhouse that some billionaire fund managers couldn’t stop buying is the Mortgage Real Estate Investment Trust (REIT) AGNC Investment (AGNC -1.01%). The company is a monthly dividend payer with a jaw-dropping yield of over 18%. For context, the company has averaged double-digit returns in all but one of the past 13 years.
Billionaire Ken Griffin of Citadel Advisors bought more than 4.27 million shares of AGNC during the second quarter. Meanwhile, billionaire fund manager Israel Englander of Millennium Management opened a position totaling nearly 2.81 million shares in the quarter to June.
Without digging too far into the weeds, mortgage REITs want to borrow money at the lowest possible short-term lending rate and buy higher-yielding assets, such as mortgage-backed securities (MBS) , with this capital. This is how the industry got its name (Mortgage REIT).
The problem lately has been the Federal Reserve’s historically hawkish monetary policy aimed at controlling inflation. Rapidly rising interest rates quickly pushed up short-term borrowing costs. When coupled with an inverted yield curve, net interest margin and book value declined for AGNC. This means lower near-term earnings and lower share price, as most mortgage REITs remain close to their respective book values.
But there may be light at the end of the tunnel for this hated industry. Although higher interest rates increase short-term borrowing costs, they will also increase yields on the MBS that AGNC continues to buy. Over time, this could be a recipe for net interest margin expansion.
In addition, AGNC manages an incredibly “safe” investment portfolio. At the end of September, all but $1.7 billion of its approximately $61.5 billion investment portfolio is made up of agency assets. An “agency” asset is guaranteed by the federal government in the event of default on the underlying security. This additional protection allows AGNC to deploy leverage to increase its profit potential.
Sabra Health Care REIT: 9.5% return
A second ultra-high yielding dividend stock that billionaire fund managers clearly love is Sabra Healthcare REIT (SBRA 0.55%). Sabra’s 9.5% return is roughly in the middle of its return range over the past six years.
Based on Form 13F filings with the Securities and Exchange Commission, Citadel’s Griffin and Millennium’s Englander added approximately 1.46 million shares and 1.95 million shares of Sabra Health Care, respectively, to their funds’ existing positions. during the quarter ended in June. With Sabra’s share price plummeting over the past two years, Citadel and Millennium buying activity appears to be an indication of REIT bargain hunting among billionaires.
The biggest issue for Sabra, owner of more than 400 total facilities involved in skilled nursing and senior housing, has been the COVID-19 pandemic. Although COVID-19 can be dangerous for all age groups, it hits the elderly particularly hard. There have been periods of heightened uncertainty in 2020 where occupancy rates have fallen and the prospect of rental defaults has increased.
Fortunately, the worst never materialized for Sabra. However, that doesn’t mean the company was unfazed.
For example, it was forced to rework its head lease agreement with one of its major tenants, Avamere, which would almost certainly have defaulted on some of its lease obligations without some adjustments. The new agreement with Avamere gives Sabra Health Care the ability to recoup higher rental rates if Avamere’s operating performance improves.
Since the depths of the pandemic in late 2020, Sabra has seen occupancy rates in its skilled nursing and senior housing communities rebound steadily. Previously, the company noted a mid-percentile rent collection rate of 99% since the start of the pandemic.
With the worst of the pandemic now likely in the rearview mirror, attention may turn to improving the company’s balance sheet (vs. North American population. As the population ages and the need for housing for people elderly and skilled nursing increases, Sabra might discover that she has significant power over rental prices.
Altria Group: return of 8.4%
The third ultra-high-yield dividend-stock billionaire that billionaires love is the tobacco giant Altria Group (MO -2.48%). The company is known to aim for a payout ratio of around 80% and currently earns 8.4%.
As equity market volatility increased in the first half of the year, billionaire Jim Simons of Renaissance Technologies, along with billionaires John Overdeck and David Siegel of Two Sigma Investments, sought the perceived safety of buying into Altria. Simons oversaw the addition of just over 5 million shares during the second quarter, while Overdeck and Siegel added about 3.52 million shares to their fund’s holding.
If there’s a big knock against US tobacco stocks like Altria, it’s that growth has slowed. As consumers have learned over the decades about the dangers of using tobacco products, adult smoking rates have dropped precipitously. This is bad news from a volume perspective for Altria – but it doesn’t tell the whole story.
For example, Altria has exceptionally strong pricing power that generally helps it outpace any drop in the volume of cigarette shipments. Since the nicotine found in tobacco is an addictive chemical, the company is well aware that its products are treated as non-discretionary items. No price inflation has yet scared off its main customers.
To add to that point, it helps when you’re the company behind America’s favorite premium cigarette brand. At the end of June, Altria accounted for 48.2% of the total share of cigarettes in the United States, with Marlboro alone accounting for 42.7%.
Altria’s businesses in alternative tobacco products are also intriguing. Although its investment in vaping company Juul was unsuccessful, Altria has not ruled out additional investments in vaping companies. Additionally, he took a $1.8 billion stake in a licensed Canadian cannabis producer. Chronos Group in 2019. If and when the US federal government gives cannabis the go-ahead, Altria will be ready to step in with product development, marketing and distribution advice for Cronos.
Tobacco stocks are no longer the growth story they once were, but they continue to generate steady, albeit modest, gains for their shareholders.