Do you like roller coasters? According to Deutsche Bank, we’re looking at some roller coaster volatility for the next few months, with near-term gains likely, followed by a Q2 retreat, and second-half gains.
The firm expects share values to fall in the next three months, perhaps by as much as 5% to 10%, for several reasons laid out by the firm’s strategist Binky Chadha.
“The more front-loaded the impact of the stimulus, and the direct stimulus checks at around a quarter of the new package clearly are one off, the sharper the peak in growth is likely to be. The closer this peak in macro growth is to warmer weather (giving retail investors something else to do); and to an increased return to work at the office, the larger we expect the pullback to be,” Chadha noted.
That’s the mid-term. In the longer view, Chadha expects markets to strengthen by year’s end, and has put a 4,100 target on the S&P 500. This is up from his previous 3,950 target, and suggests potential gains of 4% from current levels.
So, for investors, we’re looking at a rocky summer and fall, with some dips and gains likely in the markets. In that environment, a defensive stock play makes sense; it provides some stability to the portfolio, as well as some insurance should the gains not materialize. Reliable dividend stocks, with their regular payouts, provide an income stream that’s independent of the share price appreciation, as well as a share profile that is less volatile to begin with, making them the ideal move for investors worried about keeping up returns while coping with high macro volatility.
To that end, we’ve used the TipRanks database to pull up three high-yield dividend stocks that share a profile: a Buy-rating from the Street’s analyst corps; considerable upside potential; and a reliable dividend yielding over 8%. Let’s see what Wall Street’s pros have to say about them.
Monroe Capital (MRCC)
We'll start with Monroe Capital, a private equity firm invested in the health care, media, retail, and tech sectors. Monroe is focusing its business on minority and women-owned companies, or on companies with employee stock ownership plans. Monroe offers these sometimes underserved demographics access to capital resources for business development.
Monroe has shown two contradictory trends so far this year: declining revenues and earnings, along with rising share value. The company’s top line, at $12.6 million, was down 6% from Q3, and 25% year-over-year, while EPS fell 40% sequentially to 42 cents. Year-over-year, however, EPS more than doubled. Looking at share price, Monroe’s stock has gained 60% in the past 12 months.
On the dividend front, Monroe paid out 25 cents per share in December; the next is scheduled, at the same amount, for the end of this month. With an annualized payment of $1, the dividend yields a strong 9.8%. This compares favorably to the 2% average yield found among peer companies.
The dividend attracted attention from Oppenheimer analyst Chris Kotowski, rated 5-stars by TipRanks.
“We continue to see a runway to eventual dividend coverage with full fees expensed as management grows the portfolio to its target 1.1–1.2x leverage (from 1.0x currently) and redeploys funds currently tied up in non-accruals once resolved... The primary driver of return for a BDC is its dividend payout over time, and we have confidence that MRCC's new $1.00 distribution (equating to a ~10% yield) is sustainable,” Kotowski noted.
In line with his comments, Kotowski rates MRCC an Outperform (i.e. Buy), and his $12 price target suggests it has room to grow 25% in the year ahead. (To watch Kotowski’s track record, click here)
The analyst reviews on MRCC break down 2 to 1 in favor of Buy versus Holds, making the consensus rating a Moderate Buy. The shares have a trading price of $9.59, and their $11.13 average target implies an upside of 16% in the year ahead. (See MRCC stock analysis on TipRanks)
Eagle Point Credit Company (ECC)
Let’s stick with the middle-market financial sector. Eagle Point is another of the capital investment companies that seeks to turn middle-market debt into returns for investors. The company invests in CLO equity, and focuses on current income generation – in other words, ensuring a return for its own investors. While Eagle Point is a small-cap player, the company does boast $3 billion in assets under management – showing that it punches above its weight.
Last month, Eagle Point reported 4Q20 earnings, with EPS of 24 cents, below the expectation of 29 cents. However, the current earnings just edged into growth quarter-over-quarter and year-over-year, as 3Q20 and 4Q19 both came in at 23 cents.
Turning to the dividend, we find that Eagle Point does something slightly unusual. The company pays out a monthly dividend, rather than quarterly. The current payment, at 8 cents per common share, has been held steady for over a year now, and the company has not missed a distribution. At 96 cents per common share annually, the dividend yields is 8.4%. This is robust by any standard.
B. Riley’s 5-star analyst Randy Binner covers Eagle Point, and he notes that the company should have no problem in maintaining its dividend coverage moving forward.
“The company’s reported quarterly recurring CLO cash flows averaged $0.75/share over the last 12 months. Similar levels of recurring cash flows would leave a large cushion to service the $0.24 quarterly dividend going forward…. The company announced $29.5M of cash on the balance sheet as of February 9. This balance sheet cash and serviceable quarterly dividend of $0.24 contribute to a favorable liquidity position,” Binner wrote.
Binner’s comments back up a Buy rating on the stock, and his $14 price target implies a 12-month upside of 23%. (To watch Binner’s track record, click here)
Wall Street takes the same stance on ECC that it did on MRCC: a Moderate Buy consensus rating based on a 2-1 split between Buy and Hold reviews. ECC shares have an average price target of $14, matching Binner’s, and the shares are trading for $11.41. (See ECC stock analysis on TipRanks)
Hess Midstream Operations (HESM)
Midmarket financials are not the only place to find strong dividends. Wall Street pros also recommend the energy sector, and that is where we now turn. Hess Midstream is one of many companies in the midstream sector of the energy industry, providing and supporting the infrastructure needed to gather, process, store, and transport a fossil fuel products from the well heads into the distribution network. Hess has a range of midstream assets in the North Dakota Bakken formation, moving crude oil and natural gas, along with their derivatives.
Hess reported results for 4Q20 earlier this year, showing $266 million at the top line and EPS of 36 cents per share. Revenues were up 5% year-over-year, and relatively flat from Q3. EPS rose 20% quarter-over-quarter, but were down sharply compared to the 87 cents reported in 4Q19. Of interest to investors, the company reported over $126 million in free cash flow, which it used to fund the dividend.
Hess pays out its dividend quarterly, and has a reputation for not missing payments. The company has been raising the payment regularly for the past four years, and most recent dividend, at 45 cents per common share, was paid out in February. This dividend is considered ‘safe,’ as the company expects to generate between $610 million and $640 million in free cash flow next year. Those funds will fully cover the dividend, with approximately $100 million left over.
Writing from Scotiabank, analyst Alonso Guerra-Garcia sees the free cash flow as Hess’s priority going forward.
“We expect the focus this year to be on the harvesting of free cash flow (FCF) with deployment toward buybacks and further de-leveraging. Improved FCF profiles this year also better position the group for a 2H21 demand recovery. Continued energy policy changes and the energy transition may be headwinds this year, but we continue to prefer exposure to the more diversified companies with FCF after dividend (FCFAD) optionality and torque to a recovery,” the analyst opined.
To this end, Guerra-Garcia rates HESM an Outperform (i.e. Buy), with a $27 price target indicating a potential upside of 26% by year’s end. (To watch Guerra-Garcia’s track record, click here)
All in all, there are only 2 reviews on this small-cap energy company, and they are evenly split – one Buy and one Hold – giving Hess a Moderate Buy rating. The shares are trading for $21.41 and their $27 average price target suggests a one-year upside of 26%. (See HESM stock analysis 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.