The conventional wisdom is, coronavirus is here to stay. The resurgence in cases in several states, regardless of their efforts at reopening or lockdown (think Texas and California), is seen as the first sign of the ‘second wave.’
Nervous investors want some safety, and it’s natural to turn to dividend stocks to find it. These are the traditional safe plays of the market. They typically don’t offer the highest share appreciation, but them make up for that with a steady income stream from the dividend payments. You gotta be careful right now, though; many companies have slashed or suspended dividends during the pandemic crisis.
Using TipRanks database, we pulled three stocks that have kept up their payments – and are yielding better than 7% into the bargain. In addition, they all hold the coveted Strong Buy rating, and offer upsides between 10% and 20%. Let’s find out what else makes them so compelling.
KKR Real Estate Finance Trust (KREF)
We’ll start with a real estate investment trust (REIT), as these stocks have a reputation for delivering on dividends. KKR is involved in both ownership and financing of commercial real estate, operating in nine states, including such large markets at New York, California, and Florida.
The high quality and narrow focus of KKR’s business – it deals mainly with senior loans, in the $50 to $400 million range, for multifamily or retail properties – helped the company weather the downturn in Q1. Earnings and revenues remained in-line with previous quarters during 1H20. For the first quarter, KKR beat estimates on both EPS and revenue, reporting 44 cents and $32 million respectively.
Keeping earnings up, in turn, allowed the company to maintain its generous dividend policy. KKR has been paying out 43 cents per share quarterly for the last two years, and kept to that in Q1. The company declared its most recent dividend one month ago, for payment on July 15. The 43-cent rate annualized to $1.72 and gives a yield of 10.9%. This compares favorably – to say the least – to dividend yields on the S&P 500, which average near 2%.
In addition to keeping up its high-yield dividend payment, KKR also extended its share repurchase program. The program has been scheduled for expiration in June; under the new authorization, it has no expiration date and a ceiling of $100 million.
Wells Fargo analyst Donald Fandetti notes the solidity of KKR’s dividend: “From a liquidity standpoint, we don’t believe KREF would have a reason to cut the dividend... Tailwinds to earnings that would support maintaining the current dividend include positive NII sensitivity as almost all of their loans have LIBOR floors and potential for repayment fee income.”
Fandetti is bullish on the stock, rating it a Buy with a $20 price target. His target suggests a 26% upside for the stock this year. (To watch Fandetti’s track record, click here)
KKR’s Strong Buy analyst consensus rating is based on 4 reviews, including 3 Buys and 1 Hold. The shares are selling for $16.32 and have an average price target of $18.67, which indicates a one-year upside of 15%. (See KKR stock analysis on TipRanks)
Redwood Trust, Inc. (RWT)
Next on our list, Redwood Trust, is another REIT. This company is also focused on mortgage loans, primarily in the residential sector. The main part of the business is in jumbo residential loans; on the commercial side, Redwood target multifamily residential mortgage products.
The Q1 recessionary pressures from the coronavirus epidemic pushed Redwood’s operations deep into the red. Mass unemployment forced people across the country to forgo mortgage loan payments – although various government policies at local, state, and federal levels promised some relief going forward. Redwood reported a net loss of 64 cents per share in the first quarter, as revenues fell into negative territory.
On a positive note, Redwood did manage to finish Q1 with positive liquidity. The company had available unrestricted cash of $375 million at the end of March, and when the quarterly report was released, in May, that number had increased to $552 million.
Having cash available kept the dividend viable. Redwood declared its Q2 dividend in June, at 12.5 cents per share, and paid it out at the end of that month. The dividend annualizes to 50 cents and yields 7.8%, a strong return in these days of low rates and uncertain futures. One point to consider – RWT’s Q2 dividend was slashed deeply from Q1’s 32 cents; however, the company maintained it at a high-yield level, in line with regulatory requirements in REIT industry.
Credit Suisse analyst Douglas Harter believes Redwood’s dividend is sustainable, despite the cut, and looks good going forward.
“[We] are comfortable with a premium given 1) continued appreciation of credit assets and 2) book value does not capture the franchise value of the mortgage bank… RWT’s expectation of warehousing smaller balances of loans from mortgage banking should limit the amount of capital that will be need as working capital for the business. This leaves more of the current cash balances available to deploy into buybacks or new investments…”
Backing his stance, Harter rates RWT an Outperform (i.e. Buy) along with an $8 price target, which implies an upside for the stock of 22%. (To watch Harter’s track record, click here)
Overall, RWT has a Strong Buy analyst consensus rating, based on 3 to 1 split between Buy and Holds. The average price target here is $7.63, which suggests a one-year growth potential of 19% from the current trading price of $6.59. (See Redwood stock analysis on TipRanks)
Oaktree Specialty Lending (OCSL)
Last on our list today, Oaktree, is a specialty finance company. The company’s focus is customized credit and loan solutions for companies that otherwise lack access to traditional capital markets. Oaktree’s portfolio boasts 128 companies, with a total of $1.4 billion invested. Of that, 62% is first lien, and another 20% is second lien. Equity investments make up 6% of the total.
Back in February, OCSL missed on the fiscal Q1 earnings, reporting 10 cents EPS against a 12-cent forecast. That number had improved by the fiscal Q2 report in May, when the company reported 12 cents per share and beat the 10-cent estimates. Oaktree is expected to meet estimates, again at 10 cents, in the upcoming fiscal Q3 report.
The key point here is that Oaktree’s earnings have been fairly consistent in absolute numbers over the past few quarters, coming in at 10 to 12 cents. This is sufficient to cover the 9.5 cent quarterly dividend, which was last paid on June 30. OCSL dividend yields 8.6% from an annualized payment of 38 cents per share, and has been held steady for the past two years.
Bryce Rowe reviewed this stock for National Research, and is flat-out bullish.
“OCSL is one of the few BDCs with the resources, the liquidity, and the balance sheet posture to take advantage of investment opportunities that emerge… we see the potential for a higher dividend distribution over the near-to-intermediate term. Potential stock price appreciation could easily exceed 30% if OCSL executes, which could translate into a total return north of 40%...”
Rowe’s statement is forceful, and he backs it with a Buy rating and $5.25 price target, indicating confidence in at least 20% appreciation for the year ahead. (To watch Rowe’s track record, click here)
Oaktree gets a unanimous Strong Buy analyst consensus rating, based on 6 Buy reviews given in recent weeks. The stock’s current share price is $4.39, and the average price target of $5.09 suggests a healthy one-year upside potential of 15%. (See OCSL stock-price forecast on TipRanks)
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