As we close in on the final quarter of 2022, investors are looking for an answer to one question: was June’s low the bottom for stocks, or do they have more room to fall? It’s a serious question, and there may be no easy answer. Markets are facing a series of headwinds, from the high inflation and rising interest rates that we’ve grown familiar with to an increasingly strong dollar that will put pressure on the upcoming Q3 earnings.
Weighing in on current conditions from Charles Schwab, the $8 trillion brokerage firm, chief global investment strategist Jeffrey Kleintop notes these chief factors that are on investors’ minds, before coming down firmly in favor of a bullish stance of high-yield dividend stocks.
"We talk about characteristics of stocks that are outperforming across sectors and those tend to be value factors and high quality factors. The one I've been focused on most lately is high dividend payers... They've done incredibly well and usually a high dividend is a sign of good cash flow and a good balance sheet, and investors are seeking that out," Kleintop noted.
So, let’s take a look at two of the market’s dividend champs, high-yield dividend payers that have the Street’s analysts like going forward. According to TipRanks' database, both stocks hold Strong Buy ratings from the analyst consensus – and both offer dividends of up to 8%, high enough to offer investors a degree of protection from inflation.
Ares Capital Corporation (ARCC)
First up is Ares Capital, a business development company (BDC) focused on the small- and mid-market enterprise sector. Ares provides capital access, credit, and financial instruments and services to companies that might otherwise have difficulty accessing services from major banking firms. Ares’ target client base are the small businesses that have long been the drivers for much of the US economy.
At a macro level, Ares has outperformed the overall markets so far this year. The firm’s stock is down – but only by 3% year-to-date. This compares favorably to the 16% loss in the S&P 500 over the same time frame.
Ares has achieved this outperformance through the quality of its investment portfolio. The company’s portfolio, as of the end of calendar 2Q22, had a fair value of $21.2 billion, and was composed of loan and equity investments in 452 companies. The portfolio is diverse across asset classes, industries, and geographic locations, giving it a strong defensive cast in today’s uncertain market environment.
The company reported a total investment income of $479 million in the second quarter, up by $20 million, or 4.3%, from the year-ago quarter. This led to a net GAAP income of $111 million, and a core EPS of 46 cents.
The latter two results were both down y/y – but were more than sufficient to fund the company’s dividend, which was declared in July at 43 cents per common share, for a September 30 payout. The dividend annualizes to $1.72 and gives a yield of 8.7%. In addition to the common share dividend, the company will also pay out a previously authorized 3-cent special dividend. Ares has a history of keeping up reliable quarterly dividends going back to 2004.
Covering Ares for Truist, analyst Michael Ramirez describes the firm’s recently quarterly earnings as ‘impacted by greater market volatility’ which resulted “in better attractive terms for new originations coupled with higher yields- leading to confidence to increase the regular dividend.”
Looking forward, in greater detail, Ramirez added, “We continue to expect NII improvement to provide a cushion between earnings and the regular and supplemental dividend through the second half of 2022. Additionally, we anticipate the total portfolio yield will benefit from higher short term rates with the current Fed Fund futures expecting roughly 200bps of rate hikes in the second half of 2022.”
The analyst’s comments point toward further outperformance – and he backs them with a Buy rating on the stock and a $22 price target that indicates confidence in a one-year upside of 12%. Based on the current dividend yield and the expected price appreciation, the stock has ~21% potential total return profile. (To watch Ramirez’ track record, click here)
Overall, the Strong Buy consensus rating on ARCC is unanimous, based on 6 positive analyst reviews set in recent weeks. The shares are priced at $19.59 and their current $21 price target implies a modest 7% gain from that level. (See ARCC stock forecast on TipRanks)
The Williams Companies (WMB)
The next company will look at, Williams Companies, is a major player in the natural gas pipeline. Williams controls pipelines for natural gas, natural gas liquids, and oil gathering, in a network stretching from the Pacific Northwest, through the Rockies to the Gulf Coast, and across the South to the Mid-Atlantic. Williams’ core business is the processing and transport of natural gas, with crude oil and energy generation as secondary operations. The company’s footprint is huge – it handles almost one-third of all natural gas use in the US, both residential and commercial.
The firm’s natural gas business has brought strong results in revenues and earnings. In the most recent quarter, 2Q22, showed total revenues of $2.49 billion, up 9% year-over-year from the $2.28 billion reported in the year-ago quarter. The adjusted net income of $484 million led to an adjusted diluted EPS of 40 cents. This EPS was up 48% y/y, and came in well above the 37 cent forecast.
The rising price of natural gas and the solid financial results have given the company's stock a boost – and while the broader markets are down year-to-date, WMB shares are up 26%.
The company has also been paying out a regular dividend, and in the most recent declaration, in July for a September 26 payout, management set the payment at 42.5 cents. This marked the third quarter in a row at this level. The dividend annualizes to $1.70 and yields 5.3%. Even better, Williams has a history of keeping reliable dividend payments – never missing a quarter – going back to 1989.
This stock has attracted the attention of Justin Jenkins, a 5-star analyst from Raymond James, who writes of WMB: “The Williams Companies’ (WMB) attractive mix of core business stability and operating leverage via G&P, marketing, production, and project execution is still under-appreciated. WMB's large cap, C-Corp., and demand-pull natural gas-focused characteristics (and supply-push tailwinds in several G&P regions and the Deepwater) position it well for both the short- and long-term, in our view. Potential buybacks and JV optimization offers additional catalysts throughout the year, bolstering an anticipated premium valuation.”
Jenkins goes on to give WMB shares a Strong Buy rating, and his $42 price target implies a 31% upside for the next 12 months. (To watch Jenkins’ track record, click here)
Jenkins isn’t along in seeing Williams as a Strong Buy; that’s the consensus rating, based on 10 recent analyst reviews that include 9 Buys and 1 Sell. The shares have an average price target of $38.90, suggesting ~22% one-year gain from the current trading price of $32. (See WMB stock forecast 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.