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The Nasdaq made a sharp reversal this week, leading the markets’ surge and swinging back into positive territory for the year. The prospects of a $1.9 trillion stimulus package, steadying rates, economic growth, and a retreating pandemic are all reasons for optimism.
The question on everyone’s lips is, does the turnaround indicate the bull market can officially resume? Not so fast, says RBC Capital’s head of U.S. equity strategy Lori Calvasina.
“Our work on positioning suggests that the big tech unwind may be at least halfway done, but isn’t finished,” Calvasina noted.
In that case, taking a safety-first approach could prove to be a prudent solution; investors can seek shelter in a defensive play that will provide some income padding in the portfolio. Dividend stocks are a common choice; if the yield is high enough, it can offset losses elsewhere.
Bearing this in mind, we used the TipRanks' database to zero-in on two stocks that are showing high dividend yields – on the order of 8%. Each stock also holds a Strong Buy consensus rating; let’s see what makes them so attractive to Wall Street’s analysts.
BlackRock TCP Capital (TCPC)
We’ll start with BlackRock, a specialty finance company that concentrates on providing capital and credit access to mid-market companies. BlackRock is regulated as a business development company, and since its founding in 1999 it has originated more than $20.4 billion loans to over 500 client companies. Three-quarters of the company’s current portfolio consist of first lien loans; the remainder is divided among second lien loans (15%), equity (8%), and unsecured loans (2%).
BlackRock has managed to keep up a strong performance, despite the disruptions felt during the ‘corona year.’ In the company’s recent Q4 earnings report, it delivered a net investment income of 35 cents per share – which is more than enough to cover the 30-cent per share regular dividend paid out in the quarter. This marked the 35th consecutive quarter that the dividend was directly covered by earnings.
At the end of 2020, BlackRock held total assets of $1.7 billion, with a net asset value per share of $13.24, up 4.2% sequentially. The company had $342.5 million in liquid assets available at the close of the year. These positive results are reflected in the share price, which is up 24% year-to-date.
At the same time that it released the earnings report, company management also declared the Q1 dividend. At 30 cents per common share, the payment remains flat from Q4; at $1.20 annualized, it yields a hefty 8.52%. This is 4x higher than the average on the broader markets.
Robert Dodd, 5-star analyst from Raymond James, covers this stock – and he was impressed enough recently to upgrade his stance from Perform (i.e. Neutral) to Outperform (i.e. Buy).
“Credit trends at TCPC look to have broadly outperformed the BDC group versus pre-COVID levels - with non-accruals essentially flat, PIK Income lower and NAV / Share now modestly higher. We also project further modest NAV / Share growth from dividend over-earning in 2021 and 2022. We view the risk / reward as attractive at current levels,” Dodd commented.
Along with his upbeat outlook, Dodd puts a $14 price target on the stock, although the recent share appreciation has cut into the one-year upside. (To watch Dodd’s track record, click here)
The Strong Buy consensus rating on this stock is supported by 4 reviews, which include 3 Buys against a single Hold. The average price target stands $13.94, which aligns evenly with where the stock is currently trading. The real return here is the dividend yield. (See TCPC stock analysis on TipRanks)
Ares Capital Corporation (ARCC)
And now we turn to Ares Capital, also a business development and asset management company, and also focused on a middle-market corporate clientele. Ares provides cash, capital, credit, and financing services to companies that cannot necessarily access those in the usual money and credit markets; it is a vital role that helps to keep small- and medium enterprises afloat.
Ares has a portfolio valued at $15.5 billion, and consisting of 350 companies. Of the total portfolio, some 72% is made up of first and second lien secured loans. The company’s portfolio boasts a healthy level of diversification among geographical regions and industry composition.
Last month, Ares reported 4Q20 earnings, with a GAAP net EPS of 89 cents. This was an 85% increase year-over-year, and was more than enough to sustain the company’s dividend. At 40 cents per share, that dividend gives an annualized payment of $1.60, and a strong yield of 8.32%. Ares has held the dividend steady for the past 5 quarters, after reducing it from 42 cents in 1Q20 when the corona crisis hit.
Among the bulls is Wells Fargo analyst Finian O’Shea who wrote: “ARCC's origination prowess and capital structure depth, including off-balance-sheet financing vehicles, allow the BDC to produce elevated earnings. This translates into a structure that can offer the earnings alpha of a specialty lender and the stability of a large cap operator.”
O’Shea added, "ARCC has, at times, turned yesterday's lemons into today's lemonade. Most recently, Singer Sewing, which became an ARCC control company by way of a restructuring, has blossomed during the post-pandemic period and is now carried at an $86 million premium to ARCC's cost basis..."
To this end, O’Shea rates ARCC shares an Overweight (i.e. Buy) and his $20 price target on the stock implies a 7% upside potential. (To watch O’Shea’s track record, click here)
ARCC gets Wall Street’s unanimous backing; All 11 recent reviews are Buys, which makes for a Strong Buy analyst consensus rating. Shares are currently priced at $18.52, and the recent appreciation has pushed them almost to the $18.79 average price target, leaving little room for further upside. As with TCPC above, the high dividend yield provides the return potential at this time. (See ARCC stock analysis on TipRanks)
To find good ideas for dividend stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.