The big market headline this year – all year – has been the steady fall in stocks. The S&P 500 is down 20% for 2022, and the NASDAQ has fallen a disastrous 33%. And while recent data shows that there may be some hope on the inflation front, there may still be storm clouds massing for next year’s stock market.
That’s the view of Mike Wilson, Morgan Stanley's chief equity strategist. He’s been a leading voice among the bears this year, and he’s not changing that tune as we head into the New Year. In fact, Wilson sees the S&P 500 losing another 20% before bottoming out in 1H23 – a deep trough that, in his view, will coincide with a sharp drop in corporate earnings. In Wilsons words, “We're looking for an earnings recession that could be as big of a surprise to the market as it was in '08.”
We’ve taken the logical path – if Wilson is right – and started looking into defensive stocks. After all, if the first half of 2023 will bring us higher interest rates, a deep recession, and further losses in the stock market, then now is the time to take protective measures on the investment portfolio. This brings us to the classic defensive play, high-yield dividend stocks, which at their best offer two modes of protection: a steady income stream, and a yield that beats the rate of inflation.
We used the TipRanks database and homed in on two stocks with ultra-high dividend yields. These are equities currently offering investors double-digit yields – in one case, 26% – that will ensure a real rate of return. And even better, they both have a ‘Strong Buy’ consensus rating from the wider analyst community. Let’s take a closer look.
Kimbell Royalty Partners (KRP)
The first of the high-dividend payers we’ll look at is Kimbell Royalty Partners, a Texas-based land and mineral rights company with interests in all of the major onshore oil and gas production basins in the continental US. The company’s holdings total over 16 million gross acres, across 28 states. The company’s largest single area of holdings is in the Permian Basin of West Texas, where it has ownership of more than 47,000 wells.
Kimbell saw some mixed numbers in the third quarter of this year. The 3Q22 report showed a record run rate in production, of 14,985 barrels of oil equivalent per day, for an 8% increase from 2Q22. At the same time, the top line was down sequentially, due to a decline in realized oil prices. Total revenues came to $74 million, down 7.2% from Q2 – although up 49% year-over-year. Net income attributable to common units (or shares) rose slightly quarter-over-quarter, from $36.3 million to $38.3 million; the year-ago figure was a mere $6.7 million.
Kimbell saw some solid numbers in the third quarter of this year. The 3Q22 report showed a record run rate in production, of 14,985 barrels of oil equivalent per day, for an 8% increase from 2Q22. Total revenues came to $74 million, up 49% year-over-year. Net income attributable to common units (or shares) jumped sharply year-over-year, from a mere $6.7 million to $38.3 million.
The company’s dividend remains an attractive feature, with an excellent yield. The Q3 cash available for distribution, which supports the payment, came in at 66 cents per common share, and the company paid out a Q3 dividend of 49 cents per common share. This came to a 75% payout ratio of cash available for distribution; the annualized payment of $1.96 gives an enviable yield of 12.3%. That yield is over 6x the average found among S&P-listed firms, and beats inflation by over 5 points.
Kimbell’s biggest news recently, however, was the acquisition of another Texas-based mineral rights firm, Hatch Royalty. Kimbell bought Hatch for a total of $271 million, of which $150.4 million was in cash and the remainder in 7.3 million shares of Kimbell stock. The acquired assets were producing over 2,000 barrels of oil equivalent per day as of October 1, all in the Permian Basin. Kimbell estimates that it can realize ~2,500 barrels of equivalent per day from these assets for the whole of next year.
RBC Capital 5-star analyst TJ Schultz is impressed with Kimbell's execution in recent months, writing,
RBC Capital’s 5-star analyst TJ Schultz takes a bullish outlook on Kimbell, based on the recent Hatch acquisition. Describing the company’s prospects, and quality for investors, he writes: “We like KRP's acquisition of Hatch Royalty LLC as it builds scale, increases exposure to an active basin, and is immediately accretive to DCF/unit. The deal expands KRP's exposure to the Texas Delaware Basin, which will now be its leading basin by production, active rig count, DUCs, permits, and undrilled inventory. KRP continues to demonstrate an ability to execute on M&A, which we think is critical to long-term viability for this asset class, as public minerals remain a small percent of the total addressable market."
"KRP's balance sheet remains in good shape, and we view this as a buying opportunity given our commodity outlook,” Schultz summed up.
With all of that as a foundation, Schultz gives Kimbell shares an Outperform (i.e. Buy) rating, with a $24 price target to indicate potential for a strong 52% upside in the next 12 months. Based on the current dividend yield and the expected price appreciation, the stock has ~64% potential total return profile. (To watch Schultz’s track record, click here)
Overall, this high-yield div payer has has 4 recent analyst reviews on hand. They are all positive, which makes the Strong Buy consensus rating unanimous, and the average price target of $24.25 implies a one-year gain of ~52% from the current share price of $15.97. (See KRP stock forecast on TipRanks)
Star Bulk Carriers Corp. (SBLK)
Next on our list, Star Bulk Carriers, is a Greek-based company plying the drybulk ocean trade. Drybulk is a vital component of the world’s transoceanic trading network, moving large quantities of unpackaged commodities, including such items as grains, metals, and energy materials over long distances. Star Bulk owns an ‘on the water’ fleet of 128 bulk carriers, ranging in size from the relatively small Supramax carriers of 52,000 dead weight tonnes (DWT) to the giant Newcastlemax ships that can reach 210,00 DWT.
Star Bulk was impacted directly by Russia’s war in Ukraine, as three of the company’s ships were stranded in that country’s Black Sea ports. During Q3, however, two of these vessels were able to exit the war zone. The Star Helena and the Star Laura, both Kamsarmax vessels of 82K DWT, have left the Black Sea. The third vessel, Star Pavlina, another Kamsarmax ship, is manned by a Ukrainian crew and remains in Ukraine.
Of importance to dividend investors, Star Bulk finished the third quarter with $392.7 million in cash on the balance sheet, allowing the company to declare a common stock dividend of $1.20 per share. The dividend was paid out on November 29 of this year. At its annualized rate of $4.80 per common share, the dividend yields a sky-high 26%. A dividend yield of this magnitude guarantees a real rate of return, and is a clearly attractive feature of the stock. Star Bulk began paying out its dividend in 1Q21, and has paid in every quarter since then.
In coverage for Deutsche Bank, analyst Amit Mehrotra sees Star Bulk’s dividend as the key point for investors, writing, “Based on SBLK's QTD reported rates, we believe the dividend can be maintained over $1.00 per share for the fourth quarter despite rates being weaker. This would put full year 2022 dividend at over $5.50 per share… in a year that we’d characterize as about average for the dry bulk industry.”
“This highlights the resiliency of the dividend policy, even during times when rates are under pressure, and supports our very positive stance on shares. The bottom line is this performance is not a function of luck or chance, but rather the product of several years of good financial discipline and capital allocation, which is why SBLK shares have outperformed most maritime equities over the last several years, in our view,” the analyst added.
All of this adds up to Mehrotra’s Buy rating on the shares. He gives the stock a one-year price target of $33, suggesting a robust upside potential of ~73%. (To watch Mehrotra’s track record, click here)
Overall, Star Bulk has attracted the attention of 4 Wall Street analysts recently, and their reviews are unanimously positive, for a Strong Buy consensus rating on the stock. With a current trading price of $19.15 and an average price target of $29.33, SBLK shares show a potential gain of ~54% by the end of next year. (See SBLK stock forecast on TipRanks)
To find good ideas for dividend stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a 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.