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3 Big Dividend Stocks Yielding at Least 7%; Raymond James Says ‘Buy’

Get ready to make some defensive portfolio moves. At least, that’s the bottom line according to Raymond James strategist Tavis McCourt, who is taking a close look at the issues facing US investors as we put the Labor Day holiday behind us.

The key point, according to McCourt, is the sheer number of possible impactors on the market. The COVID virus is still burning its way across the world, and new variants are creeping up. The US Congress still has not come to grips with passing a budget – and moderate Senators Joe Manchin and Kyrsten Sinema are pushing the Democrats to scale back spending plans. But even scaled-back spending might not help, if Congress cannot agree on a new governmental debt limit – barring a limit increase, the Federal Treasury will be unable to continue operations past early November. And to top it all off, US GDP forecasts are weakening, inflation is rising, the jobs market is sputtering even as employers complain of a labor shortage, and now is quite certain exactly what the Federal Reserve will do regarding interest rates.

“We believe most of these issues are more likely to be resolved in a fashion that is more pro-cyclical/inflationary - thus our belief in rotation out of growth/defensives and into value/ cyclicals with higher rates. However, it’s hard not to see that at the beginning of the summer, few of these issues were viewed as a real worry except for likely negotiation around infrastructure. The 'wall of worry' for equities has certainly increased in size over the last few months,” McCourt wrote.

For many investors, the natural move in this climate is toward a defensive position, moving into stocks that will shore up the portfolio’s income stream against a rainy day. Dividend stocks are the logical place to look, and McCourt's colleagues among Raymond James' stock analysts have been picking high-yield dividend payers that look primed to gain in coming months. According to TipRanks’ database, these are Buy-rated stocks with dividend yields of at least 7%. Let’s take a closer look.

Starwood Property Trust (STWD)

First up on the list is Starwood Property Trust, a real estate investment trust. These companies have long-earned reputations as dividend champs, and Starwood is no exception. The company is focuses mainly on commercial mortgages, although its $17 billion portfolio covers a wide range of commercial, residential, and infrastructure loans and investments. Starwood is one of the country’s largest commercial mortgage special servicers.

Starwood has seen its shares rise in the last 12 months; the stock has gained an impressive 79% in the time. The company has done this even as revenues have not fully recovered to pre-COVID levels. The most recent quarter, for 2Q21, saw Starwood post revenues of $290 million and EPS of 40 cents. These figures lagged the analyst estimates, although the top line was up 9.8% from the year-ago quarter.

On the dividend, Starwood declared in June its Q2 payout of 48 cents per common share. The company has held the dividend at this level – consistently – since 2014, and has a reliable payment history going back to 2010. The dividend annualizes to $1.92 per common share and gives a yield of 7.52%. This compares favorably to the average dividend of 2% found on the general market.

5-star analyst Stephen Laws, writing for Raymond James, notes that Starwood occupies a strong position in its niche. He says of the company: “We believe STWD's diversified business, scale, and strong balance sheet warrant shares trading at a material premium to most peers…. STWD continues to experience strong interest/rent collections in 2Q, with commercial lending, the property segment, and infrastructure lending segment all receiving at or close to 100% of payments.”

These comments back up Laws’ Outperform (i.e. Buy) rating, and his $30 price target implies an upside of ~20% in the next 12 months.

The analyst summed up, "We believe a premium multiple is appropriate given potential earnings growth from new investments, embedded gains on investments not reflected in book value, the diversified investment platform, the strong external manager, and the stable dividend." (To watch Laws’ track record, click here)

Overall, this REIT gets a unanimous Strong Buy rating from the analyst consensus, with 4 positive reviews set in recent weeks. The stock has an average price target of $28.50 and a trading price of $24.91, giving it a one-year upside potential of 14.5%. Based on the current dividend yield and the expected price appreciation, the stock has ~22% potential total return profile. (See STWD stock analysis on TipRanks)

Plains All American Pipeline (PAA)

Next up, Plains All American, is a midstream energy company. These companies hold a vital position in the fossil fuel industry, moving oil, gas, and their refined products from wellheads to refineries and storage facilities to transport hubs and finally to distributors and customers. Plains All American, based in Huston, Texas, moves more than 5 million barrels of crude oil and natural gas liquids daily through its asset network. That network includes oil and gas pipelines stretching from the Canadian Rockies to the Gulf Coast, and storage facilities in California, the Great Lakes, and the Chesapeake.

PAA has seen its revenues recover steadily from the ‘COVID trough’ of 2Q20, with four quarters in a row of sequential top-line gains. The most recent, 2Q21, showed $9.9 billion at the top line, more than triple the figure from the year-ago quarter. EPS came in at a loss of 37 cents per share, the first net loss since 1Q20. The company reported strong cash flows, and forecasts $1.35 billion in total free cash flow for 2021.

That last is important, as the company’s cash generation covers the dividend. Plains All American was forced to slash the dividend payment early last year, from 36 cents to 18 cents per common share, but has held the payment steady at that level ever since. In July, the company announced its most recent distribution, which was paid out in August. At the current rate, the dividend annualizes to 72 cents per common share and gives a yield 7.51%.

In a move to streamline operations, and gain capital for corporate uses, PAA in June announced execution of an agreement to sell off $850 million in natural gas storage assets to Hartree Partners. The sale was executed as a cash transaction.

Analyst Justin Jenkins, in his coverage of PAA for Raymond James, sees this company in a generally sound position going forward.

“PAA's vertically integrated liquids supply chain should enhance the long-term optimization opportunity set and returns, and management has shown a much-larger willingness than many peers to recalibrate and trim the asset base (with the $850 million PNG sale closing yesterday), even as [the] again-increased FCF target is helpful for the story... we view the risk/reward as favorable, especially as PAA gains free cash flow momentum into 2022,” Jenkins opined.

Showing his bullish side, Jenkins rates PAA as Outperform (i.e. Buy), and his $12 price target implies a 24% upside in the year ahead. (To watch Jenkins’ track record, click here)

Overall, it’s clear that Wall Street agrees with Jenkins on the forward prospects for PAA. The stock’s 8 recent analyst reviews include 7 Buys and 1 Hold, for a Strong Buy consensus indicative of a bullish outlook. The shares are priced at $9.7 and their $13.58 average price target implies a 12-month upside of ~40%. (See PAA stock analysis on TipRanks)

Phillips 66 Partners (PSXP)

We’ll wrap up with another of the energy midstream sector’s giants, Phillips 66 Partners. This company spun off the Big Oil giant Phillips 66 in 2013, in order to ‘own, operate, develop, and acquire’ midstream assets – including pipelines, terminals, and storage facilities – for crude oil, refined petroleum products, natural gas, and natural gas liquids. In short, the whole range of products put out by the parent company.

Phillips 66 Partners operates mainly in Texas, Louisiana, and Oklahoma, but the company’s network extends into and up the Mississippi Valley and to the Rocky Mountain region. The company also has refining facilities on the West Coast and in New Jersey.

PSXP shares are up ~55% in the last 12 months, reflecting increased demand and increased traffic in fossil fuel products.

Increased business can be seen in increased earnings. The partnership company reported net earnings of $225 million in 2Q21, compared to the net loss of $18 million in the year-ago quarter. The company also reported continued progress on its C2G Pipeline, a project connecting a major storage facility to a petrochemical factory in Texas. The 16-inch pipeline will carry ethane products, and is scheduled to open in 4Q21.

Turning to the dividend, Phillips 66 Partners declared its most recent payment in July, and sent it out in August. The dividend payment was set at 87.5 cents per common share, the seventh payment in a row at this level. The dividend annualizes to $3.50 per common share, and at that rate gives a yield of 9.63%.

Once again, we’ll turn to Raymond James’ Justin Jenkins, who says of PSXP: “As the market normalizes — which 2Q21 results begin to indicate — the interplay between the Phillips franchise should be a more tangible uplift for PSXP. Over time, we can envision growth optionality via dropdowns, expansions/bolt-ons, or M&A. Meanwhile, MVC support from PSX remains a solid backstop, adding confidence in PSXP's financial flexibility... we remain positive on the medium and long-term outlook and believe PSXP's near ~10% distribution yield appropriately compensates investors for the… risks.”

Jenkins’ comments back his Outperform (i.e. Buy) rating, and his $41 price target indicates confidence in an upside of 16% for the next 12 months. (To watch Jenkins’ track record, click here)

Overall, PSXP shares have a Moderate Buy from the analyst consensus, based on 7 reviews that include 2 Buy against 5 Holds. The shares are trading for $35.33 and their $39.43 average target suggests an upside of ~12%. (See PSXP 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.