The Dynamic Dividend

Paulson Flees Low-Yielding Banks For Real Dividends

Hedge fund titan John Paulson found himself with more than $1 billion in cash after hacking down a pair of disappointing bank positions during the second quarter… and spent almost exactly that amount acquiring stocks with meaningful dividend yields.

According to the quarterly report filed by Paulson & Co. yesterday, the firm dismissed more than half of its enormous Bank of America (BAC) position and nearly 19% of its Citigroup (C) shares during the second quarter. Using average share prices during the quarter, Paulson generated roughly $747 million from the sale of his BAC shares and another $327 million from his C shares — for total proceeds of about $1.074 billion.

Using the same process to estimate average purchase prices, I’ve calculated that Paulson spent about $1.085 billion investing in stocks that yield 1% or better during the same period, buying four new dividend stocks and adding to two existing positions. Paulson’s first half of the year has been rocky at best, so its no surprise that upon dumping Bank of America and Citigroup (which currently yield just 0.54% and 0.13%, respectively) he sought the stability of stocks with real dividends.

Here’s a look at the six dividend stocks Paulson invested in during the quarter that carry a yield of 1% or better, along with the yield Paulson’s currently earning from each position. (Average purchase prices are estimates provided by GuruFocus.com.)

News Corporation (NWSA). Paulson bought 10.4 million shares of NWSA, paying an average of $17 to initiate a new position in the media conglomerate. At that price, Paulson’s stake has a yield-on-cost of 1.12% thanks to the 27% raise News Corp. gave its shareholders earlier this month.

NYSE Euronext (NYX). Paulson opened a new position in the global exchange operator, spending an average of $36.80 to acquire 3 million shares. The stake carries a yield-on-cost of 3.26%.

RLJ Lodging Trust (RLJ). Paulson purchased 2.75 million shares of RLJ during the quarter, paying an average of $17.86. The hotel-focused REIT completed its initial public offering in May, and paid a prorated dividend of $0.08 per share last quarter. The implied quarterly rate was $0.15 per share, which gives Paulson’s stake a 3.36% yield-on-cost.

Rock-Tenn Company (RKT). Paulson already owned 1 million shares of the paperboard/packaging company heading into the quarter, and he paid an average of $69.21 to add another 3.4 million to his pile. Paulson’s entire stake in Rock-Tenn carries a yield-on-cost of 1.18%, while his new block of shares yields 1.21%.

Southern Union Company (SUG). Paulson bought 4.53 million shares of SUG for an average of $30.15 during the quarter, establishing a position that is currently yielding 1.99%. The stock is trading more than 38% higher than Paulson’s entry price right now thanks to a bidding war that broke out for the natural gas company.

Wells Fargo (WFC). Paulson may have slashed his Bank of America and Citigroup positions last quarter, but that didn’t stop him from bolstering his stake in Well Fargo, which has a much larger dividend. (Unlike BofA and Citi, Wells Fargo received permission from the Federal Reserve to hike its payout earlier this year.) Paulson spent an average of $28.41 on 13.1 million shares of WFC during the quarter, and now holds a total of 35.6 million shares. His entire position carries a yield-on-cost of 1.69%, while his new block of shares yields 1.71%.