So, what’s going on in the stock markets? Are they completely haywire? Since February 19, when the bull market ended, the Dow Jones has fallen 36.6% and then gained back, in uneven steps, some 28% from the trough. Movements have been similar in the S&P 500 and the NASDAQ. For the last few weeks, both the S&P and Dow have been holding fairly steady – the S&P near 2,850 and the Dow near 23,950.
Yet, there are more questions raised than answers. Are we in a true rally, or will the slide resume? What will happen when people return to work; will the economy pop back up again, or are we in a new recession? And if a recession, how bad will it get? The answer to that last may be worse than anticipated: The number of Americans filing for unemployment benefits because of the coronavirus has soared past 30 million.
Corporate earnings season is in full swing, and the results are in-line with predictions – which is to say, profits are registering the worst quarterly decline since 2009. The economic impact of the COVID-19 epidemic is going to be with us for some time to come.
Which means, for investors looking to boost their income, that dividends are the natural way to go. Governments have cut interest rates to the bare bones in an effort to provide stimulus – the US Federal Reserve’s key rate is down to the 0.0 to 0.25% range – and US Treasury bond yields are down below 1%. Stock dividends, however, can still provide high returns, and careful investors can find high-yielding dividend stocks that also present a strong case for share appreciation.
We’ve used TipRanks database to find three stock to fit that profile. Each is showing a dividend yield of 10% or higher, and each also has at least a 30% upside potential in the coming year. Let’s see what Wall Street has to say about them.
Global Net Lease, Inc. (GNL)
We’ll start with a real estate investment trust, and reasonably so, for these companies typically show superb dividend yields. REITs exist to buy, own, and operate various forms of real property and mortgage assets, and derive their income mainly from rents and management fees. Global Net Lease focuses on commercial properties in the US and Europe. The company’s portfolio aims to provide both strong growth potential and stable dividend streams.
The dividend stream is definitely there. In mid-2019, GNL raised its dividend from 18 cents to 53 cents quarterly, reflecting stable earnings. The current payment, announced this month and set for distribution to shareholders on the 15th, is 40 cents per share – the reduction is in anticipation of lower revenues due to the current economic shock. The annualized rate, $1.60, gives a dividend yield of 12%. This is 6x higher than the average yield found among S&P listed dividend stocks – and more than 12x higher than US Treasure bond yields.
GNL’s earnings are expected to come in after hours on May 6, at 44 cents per share. EPS at that level will easily cover the dividend payment, with a payout ratio of 91%. Last quarter, GNL beat the earnings forecast, registering 44 cents EPS compared to a 42-cent prediction.
4-star analyst Michael Gorman, of BTIG, sees Global Net as well positioned to survive the COVID-19 epidemic. He points out the diversity of the company’s portfolio, particularly its geographic spread. Taking coronavirus into account, Gorman lowered the full year earnings estimates for 2020 and 2021, but remains otherwise bullish. He writes, “GNL’s large exposure to countries outside of the U.S. and its focus on office/industrial properties might provide some buffer from the consumer challenges facing the economy from Covid-19… However, as the pandemic is a global event and is disrupting both offices as well as supply chains, we suspect the portfolio will still see some impact. The primary driver of our lower estimates is decreased investment volumes due to market volatility.”
Overall, Gorman maintains his $23 price target on this stock, implying a healthy upside potential of 68% to back up his Buy rating. (To watch Gorman’s track record, click here)
From the unanimous Strong Buy consensus rating, based on 3 recent reviews, it’s clear that Wall Street agrees with Gorman that GNL is a stock worth buying. The shares are attractively priced at just $13.65, and the average price target of $21.50 suggests that there is room for 61% appreciation this year. (See Global Net Lease stock analysis on TipRanks)
Hess Midstream Operations (HESM)
Midstreaming may not be the first thing you think of when you turn your attention to the oil industry, but it’s absolutely essential. Hess Midstream provides services and facilities for the gathering, processing, storage, terminaling, and transport of crude oil and natural gas in the rich Bakken Formation of the Dakotas.
While oil and natural gas remain essential, even for an economy currently hamstrung by coronavirus, the epidemic has cut back on activity in Hess’s midstream operations. In March, the company released updated guidance for 2020. Taking the economic slowdown into account, management revised full-year net income downward to the range of $420 to $440 million, a 4% adjustment at the midpoint. On a positive note, strong year-to-date performance led the company to revise Q1 guidance and 2020 free cash flow slightly upward. Hess will report earnings on May 7, and we’ll see then how the new guidance corresponds to reality.
One hint may come from the company’s dividend. Late last month – after issuing the above guidance – Hess announced a 43.1 cent quarterly dividend payment for Q1. This is an increase of 1.2% sequentially and 5% year-over-year. Hess has been raising its dividend steadily over the past three years, and it’s an important indicator of company confidence that it did so again – even in the midst of the current epidemic. The yield, at 11.7%, is impressive by any standard.
Credit Suisse analyst Spiro Dounis takes a bullish position on HESM shares. After participating in a call with company management, Dounis notes that Hess’s contract structure allows it to maintain profits into 2021 even if rig activity halts altogether and that the company’s free cash flow is sufficient to keep up the dividend. Noting Hess’s apparent strength, he writes, “[B]uying HESM today would seem to imply you are not paying anything for growth and have considerable option value on a Bakken recovery.”
Dounis backs his bullishness with a $16 price target that implies a 10% upside potential for the stock. (To watch Dounis’ track record, click here)
Wall Street is actually more bullish on HESM than Dounis allows. The 3 Buy and 1 Hold rating add up to a Strong Buy consensus view, while the $19.25 average price target suggests room for a 31% one-year upside to the stock. (See Hess Midstream stock analysis on TipRanks)
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