Markets are riding high, with the NASDAQ and the S&P 500 at record levels. The surge in equities, along with strongly positive jobs reports from May, June, and July, give a different retrospective take on the economy’s slide in February/March, due to the anti-coronavirus lockdown policies. Investors are responding with a burst of optimism, visible in the market gains.
However, the lingering uncertainty in the wake of the coronavirus, and the looming uncertainty of the November elections, give a natural impetus to take a defensive play, finding stocks that will offer some portfolio protection should markets turn south.
And this brings us to dividend stocks. These are a traditional defensive move, guaranteeing returns through dividend payments. But not all dividend stocks are created equal. Raymond James analysts have chimed in – and they are recommending high-yield dividend stocks for investors looking to find protection for their portfolio.
Using TipRanks database, we’ve pulled up the details on three of Raymond James' recommendations. These are stocks with a specific set of clear attributes, that frequently indicate a strong defensive profile: a high dividend yield, over 10%; a Moderate or Strong Buy consensus view; and double-digit upside potential.
Starwood Property Trust (STWD)
The first stock on our list, Starwood Property Trust, comes from the real estate investment trust sector, traditionally a safe place to look for high-yield, reliable dividend payers. Starwood has its hands in both ends of the mortgage investment scene, both originating new loans and investing in commercial mortgages. The company has invested over $51 billion over the years, and its portfolio includes mortgage loans and subordinate debt up to $500 million.
Starwood saw mixed results in face of the recessionary pressures in 1H20. First quarter revenues dipped into negative territory – but earnings that quarter were strongly positive and well above the forecasts. Q2 revenues turned back into the black, while earnings fell sequentially but, again, beat the estimates.
Starwood’s management has, through all of this, maintained the company’s generous dividend. In part, this is just keeping compliant with tax regulations, which require REITs to return profits directly to shareholders – but it’s also a reflection of a balance sheet that covers the payments. Starwood pays out 48 cents quarterly per common share, a dividend that annualizes to $1.92 and gives a yield of 12.34%. That’s an excellent return by any standard – but especially so when compared to the 2% average yield found among S&P listed companies.
Analyst Stephen Laws, reviewing this stock for Raymond James, notes that Starwood’s position is based on a fundamentally strong income stream – the company has been remarkably successful at collecting rents from tenants during the first half.
“As of July 31, STWD had $821 million of cash and approved undrawn debt capacity. STWD experienced strong interest/rent payments through the month of July, with commercial lending receiving over 98% of payments, the property segment receiving 97% of payments, and infrastructure lending segment receiving 100% of payments,” Laws noted.
In line with these comments, Laws rates STWD an Outperform (i.e. Buy). His $21 price target implies an upside of 34% for the stock in the year ahead. (To watch Law’s track record, click here)
Overall, Starwood boasts a Strong Buy rating from the analyst consensus, and it is unanimous, based on 5 positive reviews set in recent weeks. The stock is selling for $15.67, and the $19 price target suggests it has room for a one-year growth potential of 21%. (See STWD stock analysis on TipRanks)
Ares Capital Corporation (ARCC)
From REITs, we move to asset management. Ares Capital specializes in business development, extending credit and financing solutions to middle-market companies on long time frames. The company’s portfolio holds over 350 investments, totaling nearly $14 billion.
Ares took a hard hit during the initial phases of the corona crisis, when client companies found they were unable to make payments during the downturn. The company saw revenue turn negative for the quarter. Like Starwood, however, Ares recovered quickly. The company’s revenue was back to positive numbers in Q2, beating estimates by a wide margin, and the third quarter forecast is for rising EPS.
Starting in the first quarter, Ares took a concrete step to preserve liquidity – by cutting the 2-cent special dividend it had been adding to the regular payment. The company has maintained the regular 40-cent per share dividend payment through 2020 so far, the most recent declaration made earlier this month. The $1.60 annualized payment makes the dividend yield here an impressive 11.23%.
In addition to tweaking the dividend, Ares also priced an unsecured note offering, totaling $750 million, and due in 2026. The notes are intended to cover Ares’ outstanding debts, clearing up the revolving debt facilities. The offering is seen as generally shoring up the company balance sheet against further economic crises.
Raymond James' Robert Dodd likes Ares for its solid balance sheet and firm business foundation. “ARCC is in a robust liquidity position and though there was modest credit deterioration q/q, it is in-line with our general expectations for the industry - and outperformed our expectations for the quarter which led to an earnings beat,” Dodd noted.
In line with these upbeat comments, Dodd maintains his Outperform (i.e. Buy) rating on the stock, and his $16 price target implies a 12% upside potential from current levels. (To watch Dodd’s track record, click here)
Wall Street is broadly in agreement with this analysis. Over the last couple of months, ARCC has received nothing but "buy" ratings from Street analysts, 9 to be exact. With an average price target of $16.00 per share, analysts expect, like Dodd, a 12% upside. (See ARCC stock analysis on TipRanks)
Owl Rock Capital Corporation (ORCC)
Last on our list of dividend champs is Owl Rock, another specialty finance company. Based in New York, Owl Rock handles direct lending to middle-market companies, offering financing solutions for acquisitions, operations, and recapitalizations. Owl Rock’s portfolio includes some $17.3 billion in assets under management, with investments in nearly 100 companies.
Owl Rock’s quarterly performance in the first half has paralleled those seen with the companies above – a sharp turn negative in the first quarter, followed by return to positive results in the second, with further gains forecast for the third quarter. Through it all, Owl Rock has also kept up its dividend payments, setting the regular payment at 31 cents per common share – but also adding an 8-cent per share special dividend, to make the total quarterly payment 39 cents in each of the last three quarters. The dividend yield is 10%, more than 5x the average yield found S&P companies, and almost 4x that found among peer companies in the finance sector.
In another parallel, Owl Rock in July conducted a public offering of $500 million in 4.25% notes, due at the beginning of 2026. The funds raised were to cover early payment of existing debt.
In his note on the stock for Raymond James, Robert Dodd sees this BDC as another company with solid mid-term prospects. He writes, specifically citing ORCC’s dividend, “Though we do not project ORCC covering the dividend from NII in the near term, we forecast coverage with a full incentive fee by 2Q21 and feel comfortable in its sustainability at current levels.”
Dodd’s Outperform (i.e. Buy) rating is supported by a $13.50 price target, indicating a 13% upside from current levels. (To watch Dodd’s track record, click here.)
All in all, with an even split between Buy and Hold ratings – it has 2 of each – Owl Rock gets a Moderate Buy from the analyst consensus view. Shares are selling for $11.95, and the average price target of $13.31 suggests it has room for 11% upside growth this year. (See ORCC 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.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.