Even though the S&P 500 is not particularly cheap right now with an average P/E of nearly 20, there are some very juicy dividends that pop up if you screen for it. The top yielding stocks, however, are often not the most safe dividends as they are usually distressed companies.
Investors often go shopping a little below the absolute highest dividend yielding stocks, but for this article, I decided to do something different. Instead, I compiled a list of the top yielding stocks held by the gurus. Every stock on this list is held by many of the absolute best value investors as selected by GuruFocus. I have to warn you: The list contains several energy stocks that look speculative, but at dividends from 7.56% up to 12.88%, they also look very lucrative.Ă‚
Transocean Ltd. (RIG, Financial)
With a $5 billion market cap, Transocean is the largest specialized deep-water and ultra-deep-water driller globally. The locations of its activities range from West Africa, Brazil to the Gulf of Mexico. The company’s clients are also diverse from emerging markets national oil companies to independents and the international oil majors. GuruFocus currently has it at a 12.88% yield, which it is the highest-yielding stock among guru holdings. Gurus who own the stock include Joel Greenblatt (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Andreas Halvorsen (Trades, Portfolio), Murray Stahl (Trades, Portfolio) and Bill Frels (Trades, Portfolio).
As you may have guessed, since it is dependent on the oil and gas industry, Transocean is going through very tough times. There are way too many rigs and more coming online, which crushes the day rates the company can charge to rent out these assets. Gurus, however, are piling into this company, which is a good sign. This could be a signal the market is at the bottom and may come back next year, though that remains to be seen.
Transocean is definitely not without its risks as more rigs are coming off contracts in the coming years, and the company tends to order rigs without contracts in place. The company also has approximately $8.75 billion of debt against $3 billion of EBITDA, so if the market starts moving in the right direction, you stand to make a lot of money. This disqualifies the company, however, as your “typical” safe dividend stock.
Tidewater (TDW)
Tidewater is a tiny $452 million market cap offshore service company that provides both vessels and marine support services. It currently yields about 11%, and its customers include offshore energy industry companies. Gurus who own the stock include Jim Simons (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and John Buckingham (Trades, Portfolio).
It is quite telling that this group of super investors are interested in such a tiny stock. Just like Transocean, it doesn’t have the characteristics of your typical safe dividend stock because it carries a debt load of $1.5 billion with EBITDA of only $341 million. It trades at roughly 1.3x operating cash flow, which gives you an idea of how distressed this company is. If energy comes back, this will be a multibagger, and I bet that’s why the gurus above own it. How they are going to honor Warren Buffett’s rules of “never lose money,” I’m not quite sure.
Noble Corp PLC (NE, Financial)
Noble Energy is a $14 billion market cap oil and gas producer that isn’t as widely diversified as some of its peers. It is focused on assets in the U.S., Equatorial Guinea and Israel. Growth is expected to come from low cost U.S. shales, Niobrara and Marcellus and its assets in Israel. Because of its exposure to Israel, the company is certainly not without geopolitical risk with the region currently in a hotbed of conflict.
Noble has also historically been very well-managed and rewarded shareholders. Because of its top of the line execution, its targets are high and now it needs to live up to them. I prefer betting on underdogs, but then again with its 9.47% yield, at least some people don’t believe Noble is going to live up to its reputation. With its $8 billion in debt and $2.58 billion in EBITDA, it isn’t as distressed as the two picks above, but it is a far cry from a safe investment. Gurus who own the stock include Ray Dalio (Trades, Portfolio), Steven Cohen, Ronald Muhlenkamp (Trades, Portfolio) and David Dreman (Trades, Portfolio).
Avon Products Inc.Ă‚ (AVP)
At fourth place, we finally encounter a stock yielding 8.42% that isn’t in the energy sector, and the only one not in the industry within this top 5. Avon Products is a $1.5 billion market cap multi level marketing company, just like its infamous peer Herbalife (HLF). The company’s 6 million representatives sell its products all over the world in 60 countries. Its product mix is very well-suited to the model including cosmetics, fragrances, skin care, fashion and home products and gifts.
The firm is highly dependent on foreign sales, as it realizes only 10% of revenue domestically. Recently it made a deal with Coty, where 1.5 million of Avon’s reps market a number of Coty fragrances in Brazil. If this is a success and the deal is expanded to other countries, it could be a meaningful value driver.
The firm is yielding a high percentage because it is suffering along with other MLM companies, and it is having some trouble with high turnover among its representatives. The firm has about $2.31 billion of debt. A common theme among these high yielders is high debt, but it is also coupled with solid EBITDA, in this case in excess of $530 million. Gurus who own the stock include Donald Yacktman (Trades, Portfolio), Michael Price (Trades, Portfolio), Wallace Weitz (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio).
Royal Dutch Shell (RDS.B, Financial)
Royal Dutch Shell is the only oil major in this list sporting a market cap of nearly $160 billion. Investors, however, have been frustrated with Shell after it underperformed for years on end. There is some hope the new CEO Ben van Beurden can get Shell to the level Exxon (XOM) and Chevron (CVX) are operating at, but that belief is evidently not widespread as the stock yields an attractive 7.56%.
The most recent disappointment has been the firm's arctic exploration campaign, which was met with a lot of resistance from environmentalist groups, but also from large shareholders like pension funds. Shell spent billions of dollars on the project, but ultimately is not going to pursue it further. The company has dialed back investments as it does not want to endanger its dividend, which it will only very reluctantly lower. Gurus who own the stock include Steven Cohen, Richard Pzena (Trades, Portfolio), Hotchkis & Wiley and Jeff Auxier (Trades, Portfolio).
