Shares of Blackstone Group (BX -1.73%) have tumbled more than 40% from their peak. That sell-off comes even though the leading alternative asset manager is thriving in the current environment. Its various funds have significantly outperformed public stock and bond markets. That's leading more investors to entrust Blackstone with their precious capital, driving significant growth in its assets under management and fee-related income.

Those surging fees are allowing Blackstone to pay a lucrative dividend. With its share price slumping, its dividend yield is over 6%. Add that big-time yield to Blackstone's growth prospects and discounted stock price, and it has significant total return potential. 

A haven amid the market storm

Investors are flocking to Blackstone these days. They poured another $44.8 billion into its various funds and investment vehicles during the third quarter, pushing the total to $337.8 billion over the last 12 months. That boosted Blackstone's assets under management (AUM) to $950.9 billion. AUM has surged 30% over the past year.

More than $700 billion of Blackstone's AUM is fee-bearing, a 34% year-over-year increase. That enabled the alternative asset manager to generate $1.2 billion of fee-related earnings, or $0.98 per share, in the third quarter, up 51% from the prior-year period. Meanwhile, distributable earnings, which includes its net performance revenues as funds deliver on their return objectives, totaled $1.4 billion, or $1.06 per share. Blackstone returned all that money to shareholders. It declared a $0.90 per share dividend payment and repurchased another 2 million of its beaten-down shares.

A big driver of Blackstone's surging AUM and fee-related earnings is the strong relative performance of its funds compared to the public stock and bond markets. While the traditional 60/40 portfolio (weighed 60% stocks and 40% bonds) has declined 20% through the third quarter -- delivering its worst return in nearly 50 years -- Blackstone has protected investor capital amid this decline. Most of its strategies have positively performed over the past 12 months. More investors are therefore entrusting Blackstone with more of their capital.

Accelerating the shift to alternatives

The public stock and bond market turbulence is leading more investors to rethink their allocation strategy. Blackstone's CEO, Steve Schwarzman, stated on the third-quarter call that investors "have found it difficult to achieve their objectives by investing in traditional asset classes alone. That's why LPs (limited partners) around the world are choosing to increase allocations to alternatives (i.e., private equity, real estate, hedge funds, and infrastructure), in particular, to Blackstone."

The accelerating shift to alternatives should continue in the coming years. Schwarzman noted on the call that:

Recent research from Morgan Stanley estimates that private markets AUM will grow 12% annually over the next five years. We shared growth in areas such as infrastructure, real estate and private credit as investors seek yield and inflation protection. All areas of distinctive competence here at Blackstone. From a channel perspective, Morgan Stanley predicts the greatest growth among individual investors, with allocations to alternatives from high net worth investors more than doubling in five years to 8% to 10% of their portfolios. This represents a major paradigm change when we identified over a decade ago and trillions of dollars of opportunity.

Given Blackstone's strong brand reputation for delivering results, and growing products geared toward individual investors, its AUM could expand at an even faster pace in the future. It would support the continued rapid growth in its fee-related earnings.

That would give Blackstone more money to return to shareholders. The company's capital-light model allows it to return 100% of its earnings to shareholders via dividends and share repurchases. As such, they should see higher dividend payments in the future to go along with value-enhancing share buybacks. Add those cash returns to its earnings growth, and Blackstone could produce strong total returns from here, especially given this year's slide in its stock price.   

Big-time income and upside potential

Blackstone returns all its earnings to shareholders. While that strategy causes dividends to ebb and flow with its income, payments have risen over the years as the company's earnings grow. Those upward trends should continue as Blackstone capitalizes on its strong brand and the shift toward alternatives. With its stock down sharply despite its continued success, it looks like an attractive option for investors seeking lots of income and upside potential.