After a strong day trading, markets are hovering near record levels. The S&P 500 is just 0.5% off its highest level ever. So as far as the stock markets can show, there is no economic recession. Things are looking up.
Of course, we all know that the crises haven’t ended. The coronavirus is still out there. While daily data shows that the number of cases is starting to decline, there remains a strong public fear of the virus. Early efforts to control corona pushed us into an artificial recession – a sort of economic medically induced coma – that we’re now starting to climb out from. Yet, jobs are returning -- the July employment numbers beat the expectations -- so perhaps that stock market optimism is justified after all.
Justified or not, in times like these a smart investor protects his portfolio. You don’t have to go full-on prevent with the defensive plays, but finding some solid dividend stocks will shore up your portfolio’s income stream, making it more resilient against a variety of market pressures.
With this in mind, we used the TipRanks database to pull up the stats on three stocks that analysts have tapped as buying propositions. These are stocks with a specific set of clear attributes, that frequently indicate a strong defensive profile: a high dividend yield — over 8%; and a considerable upside potential.
Holly Energy Partners (HEP)
We’ll start in the energy industry, where Holly Energy Partners provides transportation services – pipelines, terminalling, and storage – for crude oil and petroleum distillates. The company serves the oil industry in the Texas and Rockies regions, with operations in New Mexico-Texas-Oklahoma and Colorado-Utah. Holly has a market cap of $1.65 billion, and saw $533 million in 2019 revenues.
Holly recently reported Q2 earnings, and the results beat the expectation. EPS came in at 48 cents per share, far better than the 29-cent forecast and equal to the Q1 earnings. Where many companies have seen severe dips in earnings during the ‘corona half,’ Holly has managed to avoid that. Revenue for Q2 was down year-over-year and sequentially, coming in at $114.8 million.
While somewhat mixed, the earnings were seen as generally positive, and HEP shares have gained 15% since the release.
On an unequivocally positive note for investors, Holly has maintained its dividend. The company declared its divided last month, for 35 cents per common share, paid on August 13. It’s important to note here that back in April the company slashed its dividend payment by 48%. The cut was made to keep the dividend within the distributable cash flow, affordable for the company – and kept up for shareholders. The July declaration marks the second quarter in a row at the lower rate, and shows that Holly has been able to keep the dividend reliable despite the crisis. Looking at numbers, HEP’s dividend payment offers investors a yield of 8.9%, almost 4.5x higher than the average yield among S&P 500-listed companies.
Raymond James analyst Justin Jenkins is sanguine about HEP’s ability to operate profitably in the current environment. He writes, “HEP's fee-based cash flow profile, backed by substantial MVCs has shielded the partnership from a measure of the macro impact. While continued headwinds to refining runs will drive some y/y earnings degradation this year, we expect the partnership's earnings to mostly recover in 2021 as HEP's downstream-focused operational footprint provides relative insulation from declining U.S. oil & gas production.”
In line with these comments, Jenkins rates the stock Outperform (i.e. Buy), and his $18 target price implies a one-year upside potential of 16%. (To watch Jenkins’ track record, click here)
Overall, Holly Energy Partners has a Moderate Buy rating from the analyst consensus, with 4 Buys and 3 Holds set in recent weeks. The stock is selling for $15.60, and at $17.80 the average price target suggests a 14.5% upside potential. (See HEP stock analysis on TipRanks)
Dynex Capital (DX)
Next on our list, Dynex Capital, comes from the real estate investment trust sector. These companies have long been known as dividend champs, due to a regulation in the tax code which requires them to pay a set portion of profits directly back to shareholders. Dividends are a convenient vehicle for compliance. Dynex invests in mortgage backed securities, and focuses on portfolio stability and long-term returns.
Dynex saw revenues dip into negative territory in Q1, but turn back strongly positive in Q2. The $194.8 million reported was the strongest quarterly revenue of the past year. Dynex shares saw their heaviest trading in two months on the release date, and have kept their share value stable since.
Strong earnings have supported Dynex’s dividend. The company’s profit-sharing payment is unusual in that it is paid out monthly. This tends to result in lower – but more frequent – individual payments. At 13 cents per share, Dynex’s dividend annualizes to $1.56 and offers a robust dividend yield of 10.2%. This is a strong return by any standard.
Once again, it should be noted that this is a company which has recently cut back on the dividend payment. Dynex reduced its monthly common stock dividend from 15 cents per share to the current 13 cents starting with the June payment. The stated reason was to keep the dividend affordable for the company. Dynex appears to have been successful in that, as they’ve now kept the 13-cent payment for three consecutive months.
Christopher Nolan, 4-star analyst from Ladenburg, sees Dynex as a solid REIT with a strong portfolio and steady returns. He raised his outlook on the stock from Neutral to Buy, and set a price target of $17, indicating room for 9% upside growth in the coming year. (To watch Nolan’s track record, click here)
"Following 2Q20 results and DX management increasing its core ROE target range to 8%-10% (from target core ROE of 7%-8% articulated last quarter), we are raising our investment rating to Buy from Neutral," Nolan noted.
The consensus rating on Dynex is a Moderate Buy, but it is unanimous, based on 2 recent Buy ratings, including Nolan’s upgrade. The stock’s $18 average price target suggest it has nearly 16% upside for the year ahead. Shares are currently selling for $15.28. (See Dynex stock analysis on TipRanks)
Gladstone Commercial (GOOD)
The last stock on today’s list is another REIT. Where Dynex, above, focuses on mortgage backed securities, Gladstone get its hands on actual real properties. The company invests in industrial and office properties around the country, both single tenant and anchored multi-tenant types. Gladstone’s portfolio includes 122 properties, in the industrial, medical, and office segments, with locations in 28 states. Occupancy is 95.5% and has remained consistently above 95% since 2003.
Gladstone’s combination of long-term leasing and long-term debt lock has built up a portfolio that provides steady returns. As a result, earnings remained strong despite the corona crisis. Q1 EPS was 40 cents, stable sequentially and beating the forecast. In Q2, the EPS grew modestly to 41 cents and again beat expectations. Revenues were steady at $33 million in both quarters, and significantly higher than the revenues recorded in Q4 2019.
The solid earnings performance underlies Gladstone’s 12.5 cent monthly dividend. The company declared the July/August/September dividends last month, keeping the payment stable. The dividend has been held at its current level for over a year now, and the company has a 16-year history of dividend reliability. At 12.5 cents monthly, the payment annualizes to $1.50 and offers investors a dividend yield of 8.1%. For comparison, S&P-listed companies have an average dividend yield of just about 2%, and the US Treasury bonds are yielding under 1%.
Covering GOOD for B. Riley FBR, 4-star analyst Craig Kucera notes the company’s success in keeping up the income stream. He writes, “While many of GOOD's retail-focused single-tenant net lease peers had challenges collecting 2Q20 rent, GOOD collected 98% of cash rent for the quarter and provided rent deferrals to the remaining 2% of tenants that need to be repaid by 1Q21. July rents have demonstrated similar strength, with 99% collected in 3Q20…”
Kucera rates GOOD shares a Buy, and his $20 price target suggests the stock has room for 9% growth. (To watch Kucera’s track record, click here)
Gladstone has a unanimous Strong Buy from the analyst consensus, based on 3 positive reviews. The stock is selling for $18.49 and the average price target matches Kucera’s, at $20. (See GOOD 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.