“Don’t Fight the Fed” was chapter 4 in investing legend Martin Zweig’s landmark book Winning on Wall Street. Zweig dedicated 40 pages to explain readers why they should “go with the flow” with respect to the Fed’s trend.
As we heard from Fed Chair Jay Powell himself today, the Fed is committed to bring down inflation even if it causes some economic pain. Powell had signaled the Fed is likely to keep raising interest rates in the months ahead, and that could spell recession down the road.
It’s a situation tailor made for defensive stocks. And this brings us to dividend stocks. These are a traditional defensive move, guaranteeing returns through dividend payments.
Against this backdrop, Wells Fargo analysts have given the thumbs-up to two dividend stocks yielding around 8%. Opening up the TipRanks database, we examined the details behind these two to find out what else makes them compelling buys.
Starwood Property (STWD)
We’ll start with Starwood Properties, a real estate investment trust (REIT) with a $25-plus billion portfolio ranging across commercial, infrastructure, and residential lending, as well as investing and services. The company is based in Greenwich, Connecticut and has offices in New York City, San Francisco, and Los Angeles. Almost one-third of the portfolio is focused on multifamily residences, and the company is one of the largest commercial real estate lenders in the US.
Starwood’s revenues have been remarkably stable for the past two years, featuring slow incremental gains at the top line. The most recent quarterly release, for 2Q22, showed $325.5 million at the top line, a total that supported distributable earnings of 51 cents per diluted share.
That last figure is important for return-minded investors, as it supports the company’s dividend payment. REITs as a group have long been known as ‘dividend champs,’ and Starwood, with a reliable payment history stretching back to 2011, is no exception.
The company pays out a common share dividend of 48 cents, comfortably below the distributable earnings figure. The dividend was last paid out in July, and at its current annualized rate of $1.92 it gives a yield of 8.08%. This is only a half-percentage point below the rate of inflation, and so gives investors a degree of protection against rising prices.
In his coverage of Starwood for Wells Fargo, analyst Donald Fandetti takes a highly upbeat view, writing: “Good quarter for STWD, and they are well positioned to weather a potential recession in our view. While deal flow was robust this quarter, management is positioning with some caution near-term as they see potentially even better opportunities over the horizon. We also expect to see more upside to the Woodstar Fund portfolio valuation given rent increases.”
Unsurprisingly, Fandetti rates STWD an Overweight (i.e. Buy), while his $27 price target implies a one-year upside potential of 15%. (To watch Fandetti’s track record, click here)
It’s clear from the unanimous Strong Buy analyst consensus rating – based on 6 recent reviews on file – that the Wall Street analysts are in broad agreement with the Wells Fargo view. The shares have an average price target of $27.33 indicating ~17% upside from the current trading price of $23.39. (See STWD stock forecast on TipRanks)
Golub Capital BDC (GBDC)
The next stock we’ll look at is Golub Capital, a business development company (BDC) that caters to middle market firms that might otherwise have difficulty accessing capital. Golub had, as of June 30 this year, a portfolio worth ~$5.6 billion, with debt and equity investment in 328 companies. Golub’s portfolio is composed mostly of first lien loans, with smaller investments in junior debt and equity. Almost one-fourth of the total portfolio is in the software industry, with healthcare and specialty retail sectors making up another 15%.
Golub recently reported its results for Q3 of fiscal year 2022, and showed $97 million at the top line – up 19% year-over-year. The company’s earnings came in at 34 cents per share, a y/y gain of 17%. Both revenues and earnings beat the forecasts.
Current earnings are more than sufficient for Golub to keep up its dividend payment of 30 cents per share. The company raised the dividend to its current level at the end of last year, and the next payment is scheduled for the end of September. The payment currently annualizes to $1.20 per common share and yields 8.5%. That’s equal to last month’s inflation rate.
Well Fargo analyst Finian O’Shea noted that Golub accelerated its activity in the recent quarter, writing of the company: “The BDC stepped on the gas this quarter, with leverage growing to 1.17x net (from 1.07x). This came less from unrealized marks ($41 million) than net deployment ($278 million) with management taking advantage of its comparatively good capital position.”
A BDC with a sound strategy and solid foundation is sure to have a good future, and O’Shea puts an Overweight (i.e. Buy) rating on the stock, as well as a $15.50 price target that suggests ~11% one-year upside potential. (To watch O’Shea’s track record, click here)
For now, Golub holds a Moderate Buy consensus rating from the Street’s analysts, based on 2 Buys and 1 Sell review set in recent weeks. The shares are trading for $13.92 and their $15.33 average price target implies ~10% upside. (See GBDC stock forecast on TipRanks)
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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.