10 Cheap Dividend Stocks Loved by the Smart Money

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We’ve found ten cheap dividends stocks that hedge funds were in love with during the third quarter. Dividends play a big role in total stock market returns, hence the reason we have a special appreciation for those stocks that have solid dividend yields—especially in our current low rate environment. In a span that covers the last 30 years leading up to 2012, the Wall Street Journal notes that dividend-paying stocks have returned an average of 8.9% annually, compared to 1.8% for non-dividend paying stocks.

To add to this notion, the dividend stocks we have found are also trading cheap relative to the market with P/E ratios less than 15x earnings. Each stock listed has a market cap of more than $30 billion, a dividend yield of at least 3% and more than 30 hedge funds (of the funds we track; see full coverage here) holding ownership. We have ranked these stocks by the number of hedge funds reported to own these stocks at the end of the third quarter, from largest to smallest.

The most popular cheap dividend stock among hedge funds is Microsoft (NASDAQ: MSFT). There were 96 hedge funds with Microsoft positions at the end of September. The tech giant pays a dividend that yields 3.5% and trades at only 14.4x earnings. Microsoft is expected to see revenues up 8.5% in 2013 and then 7% in 2014. Driving this growth will be its Windows operating system, expected to see segment revenues up 18% in 2013. Microsoft trades in line with its major tech peers at just over 14x earnings, but is very cheap on a forward basis at 8x earnings. Microsoft is billionaire Jim Simons' top pick (check out all his top picks).

The second most popular dividend paying stock among hedge funds is Freeport-McMoRan Copper & Gold (NYSE: FCX). Freeport saw 49 funds as owners at the end of 3Q, and pays a dividend yield of 3.2%. Its 12.6x P/E is below top competitor Southern Copper’s 16x mark, and its 8x forward P/E makes the mining company a solid value play in our opinion. Freeport is one of the world’s largest copper producers and is expected to grow revenues 30% in 2013 after a drop of 14% in 2012. Global economic strengthening should help drive 2013 revenue increases as copper prices are lifted on the back of increased copper demand.

BP (NYSE: BP) is expected to continue its $45 billion asset sale and annual production growth of 1% over the next five years. BP had 44 funds as owners at the end of 3Q and also trades among the cheapest in its industry at 7.6x. After a brief suspension of its dividend, BP has paid a quarterly dividend since the beginning of 2011 and pays the highest dividend yield of our ten stocks at 5.2%. BP plans to modernize 50% of its U.S. downstream assets and sell the rest, while already boasting over $15 billion in cash at the end of the third quarter. BP is one of Seth Klarman's 3Q value plays; Klarman is the author of Margin of Safety and is the manager of one of the world's largest hedge funds, The Baupost Group (check out all his new value picks).

Intel (NASDAQ: INTC) trades at one of the lowest P/E ratios in the semiconductor industry at 8.5x. Intel also has one of the highest dividend yields at 4.6%. Intel has been pressured of late—down almost 20% year to date—due to a hastening decline in PC sales. Future growth, though, should be driven by data center demand and emerging market expansion—where EM currently account for around 66% of PC sales. Expected to grow at 12% over the next five years, Intel is one of the best ‘growth at a reasonable price’ opportunities in the industry with a PEG ratio of 0.8. Even including non-dividend payers, Intel is one of the top ten stocks loved by the hedge fund industry, with 44 funds holding interest.

Chevron (NYSE: CVX) is another energy stock that makes this list, with 43 funds holding interest at the end of last quarter. Chevron has experienced various new developments of late, notably its liquid natural gas projects in Australia and Asia. Production between 2012 and 2014 is expected to grow by just 1% a year, though 5% growth is forecasted for 2014-2017. Driving this eventual surge in production will be Chevron’s restructuring of downstream operations, making the energy company smaller and less complex. A larger focus on upstream projects will increase margins quite significantly, while LNG operations will drive revenue growth. Chevron pays a solid dividend that yields 3.4% and has a P/E of only 8.7x.

Here is a list of all 10 cheap dividend-paying stocks loved by hedge funds during the third quarter:

<table> <tbody> <tr> <td> <p><strong>Ticker</strong></p> </td> <td> <p><strong>Company</strong></p> </td> <td> <p><strong>Dividend Yield (%)</strong></p> </td> <td> <p><strong>P/E</strong></p> </td> <td> <p><strong>Hedge Funds</strong></p> </td> </tr> <tr> <td> <p>MSFT</p> </td> <td> <p>Microsoft Corporation</p> </td> <td> <p>3.5</p> </td> <td> <p>14.4</p> </td> <td> <p>96</p> </td> </tr> <tr> <td> <p>FCX</p> </td> <td> <p>Freeport-McMoRan Copper & Gold</p> </td> <td> <p>3.2</p> </td> <td> <p>12.6</p> </td> <td> <p>49</p> </td> </tr> <tr> <td> <p>BP</p> </td> <td> <p>BP PLC</p> </td> <td> <p>5.2</p> </td> <td> <p>7.6</p> </td> <td> <p>44</p> </td> </tr> <tr> <td> <p>INTC</p> </td> <td> <p>Intel Corporation</p> </td> <td> <p>4.6</p> </td> <td> <p>8.5</p> </td> <td> <p>44</p> </td> </tr> <tr> <td> <p>CVX</p> </td> <td> <p>Chevron Corporation</p> </td> <td> <p>3.4</p> </td> <td> <p>8.7</p> </td> <td> <p>43</p> </td> </tr> <tr> <td> <p>WAG</p> </td> <td> <p>Walgreen Company</p> </td> <td> <p>3.2</p> </td> <td> <p>14.0</p> </td> <td> <p>43</p> </td> </tr> <tr> <td> <p>COP</p> </td> <td> <p>ConocoPhillips</p> </td> <td> <p>4.6</p> </td> <td> <p>7.0</p> </td> <td> <p>37</p> </td> </tr> <tr> <td> <p>LLY</p> </td> <td> <p>Eli Lilly & Co.</p> </td> <td> <p>4.0</p> </td> <td> <p>13.3</p> </td> <td> <p>37</p> </td> </tr> <tr> <td> <p>GD</p> </td> <td> <p>General Dynamics</p> </td> <td> <p>3.1</p> </td> <td> <p>10.0</p> </td> <td> <p>34</p> </td> </tr> <tr> <td> <p>LMT</p> </td> <td> <p>Lockheed Martin</p> </td> <td> <p>3.9</p> </td> <td> <p>10.7</p> </td> <td> <p>31</p> </td> </tr> </tbody> </table>

We believe that Microsoft offers some of the best value in the tech industry with a variety of products and markets, notably its new operating system Windows 8 and Windows Mobile operating system. The tech giant Intel is one of the cheapest in the industry with one of the highest dividend yields. With gold prices expected to appreciate on the back of the Fed’s commitment to keep rates low through 2015, Freeport should see solid appreciation over the next few years. BP and Chevron also look to perform well over the interim on solid growth opportunities in natural gas and increased energy consumption. 

This article is written by Marshall Hargrave and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold, Intel, and Microsoft. Motley Fool newsletter services recommend Chevron, Intel, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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