Peter Simmie’s Bristol Gate Capital Partners is a Toronto, Canada-based hedge fund that invests primarily in dividend stocks. Bristol Gate uses both machine learning and fundamental analysis tools to uncover stocks with strong dividend growth prospects. The firm, which was founded in 2006 by Mr. Simmie, who currently serves as its Chief Investment Officer, believes that by focusing on a concentrated portfolio of stocks with strong dividend growth potential over the coming 12 months, it can build a portfolio that will beat the market over the long-term while limiting downside risk.
Bristol Gate’s US Equity Strategy has delivered impressive results from its inception in 2009 through January 2020, with a compound annual return of 17.86%. The strategy had one of its best years ever in 2019, delivering returns of 35.53%. 2017 was another strong year for the strategy, which returned just over 20%. Its holdings have achieved average annual dividend growth of 20.4%, with an average yield of 1.6%. Bristol Gate had over $971 million in assets under management as of June 2020.
Let’s take a look at five of Bristol Gate Capital Partners’ recent purchases, which could achieve significant dividend growth in the coming quarters.
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Moody’s Corporation (NYSE:MCO)
Dividend Yield: 0.77%
Bristol Gate made a huge investment in Moody’s Corporation (NYSE:MCO) during Q2, opening a new position in the stock that immediately elevated it to the second-most valuable holding in the fund’s 13F portfolio. Hedge funds have been growing far more bullish on the credit ratings agency in recent years, with ownership of the stock among the funds tracked by Insider Monkey doubling in the last two years.
Moody’s has been consistently growing its dividend payments over the past decade, from just $0.105 in 2010 to $0.56 in 2020 and there is plenty of room for further growth, with the company generating strong cash flow and having a payout ratio of just 22.4%. Whether or not incoming CEO Robert Fauber, who takes over at the beginning of 2021, makes some noise by taking an even more aggressive stance on the company’s dividend payments, future dividend growth appears promising.
Microsoft Corporation (NASDAQ:MSFT)
Dividend Yield: 1.00%
Bristol Gate also added a large new position in Microsoft Corporation (NASDAQ:MSFT) to its 13F portfolio during the June quarter, buying over 262,000 MSFT shares. Ranking second on Insider Monkey’s list of the 30 Most Popular Stocks Among Hedge Funds, Microsoft was owned by 222 of the select group of funds tracked by Insider Monkey.
Microsoft has risen its dividend payments at a similar pace as Moody’s over the past decade, hiking it from $0.13 in 2010 to $0.56 as of its next payout in December 2020. With a payout ratio in the 33% range and ongoing strong earnings growth, Microsoft’s dividend certainly looks very sustainable and poised for future growth.
Dollar General Corp. (NYSE:DG)
Dividend Yield: 0.65%
Bristol Gate bought just over 274,000 shares of Dollar General Corp. (NYSE:DG) during Q2, opening a new position in the discount retailer. DG has been extremely popular among hedge funds since early 2019, with the number of shareholders more than doubling during that time among the funds tracked by Insider Monkey.
Dollar General has raised its dividend payments by just over 50% over the past five years, to $0.36 in 2020 from $0.22 in 2015. The pandemic hasn’t fazed DG in the slightest, as the company’s revenue and income have surged in 2020 thanks to cash-strapped shoppers heading to its more than 16,000 locations across the U.S in droves. With nearly $3 billion in cash on hand and a dividend payout ratio of just 16%, Dollar General is in a great position to begin returning more money to shareholders if it so chooses.
Activision Blizzard Inc. (NASDAQ:ATVI)
Dividend Yield: 0.52%
Bristol Gate also opened a stake in video game developer Activision Blizzard Inc. (NASDAQ:ATVI), buying over 681,000 shares in Q2. Hedge funds have been piling into ATVI over the last year, pushing the stock into the top 30 most popular among hedge funds and elevating it to the most popular gaming stock.
Unlike publicly traded gaming rivals Electronic Arts Inc. (NASDAQ:EA) and Take-Two Interactive Software, Inc. (NASDAQ:TTWO), Activision Blizzard also pays out an annual dividend, which it has been raising more aggressively over the past six years, doubling its payouts over that period. The gaming industry has been one of the big winners of the pandemic, and ATVI has been no exception, achieving record revenue and net income in Q3. With over $7.4 billion in cash and a payout ratio under 15%, it’s not surprising that Bristol Gate is intrigued by the future possibilities surrounding the company’s dividend.
CME Group Inc (NASDAQ:CME)
Dividend Yield: 2.26%
Lastly, Bristol Gate opened a new stake in CME Group Inc (NASDAQ:CME), buying over 313,000 shares during Q2. That makes it one of many hedge funds to take a growing interest in CME, as there’s been a 50% surge in hedge fund ownership of the stock over the past year among the funds tracked by Insider Monkey.
If the current dividend yields on the above stocks were disappointing, CME remedies that somewhat with a yield above 2%. The Chicago Mercantile Exchange does however have a more volatile dividend payment history, which included a huge cut to its dividend in 2012 from which it has yet to fully recover, as well as fluctuating variable dividend payouts made each December. CME also has the highest payout ratio of all of the stocks covered, though it nonetheless stands at a reasonable 50%.
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Disclosure: None. This article is originally published at Insider Monkey.