We’re about halfway through earnings, and of the S&P-listed companies that have reported, more than 80% are beating the forecasts for earnings, revenues, or both. Wall Street is predicting that Q3 profits will grow more than 35% year-over-year.
On another positive note, US consumer confidence rose last month, with an October print of 113.8, better than the expectation of 108, and beating the September reading of 109.8. The October gain marks a reversal of a three-month fall.
Watching the situation for Piper Sandler, chief market technician Craig Johnson comments that, “Risk appetite remains on the table for U.S. equities.” He goes on to add, “Corporate earnings have been the key catalyst behind the recent record-high rally as robust demand continues to offset well-known supply constraints and pricing pressures.”
Against this backdrop, Piper Sandler's stock analyst Crispin Love has been searching the markets for the ‘right’ buys, and his picks bear a closer look. Interestingly, he's been tapping high-yielding dividend payers as an investment play of choice.
The TipRanks database sheds some additional light on three of the analyst's picks – Strong Buy stocks with dividends yielding 7% or better. Let's take a closer look.
Hercules Capital (HTGC)
First up is Hercules Capital. This business development company (BDC) lives in a unique niche of the specialty finance world, investing in venture capital debt. That is, Hercules provides financing options for pre-IPO emerging companies, providing an alternative to venture capitalists. Since it first got into business 18 years ago, Hercules has provided capital funding for over 540 companies, with the cumulative total of the financing reaching $12 billion. Hercules’ investments are focuses on science-oriented client firms.
Hercules offers its customers loans ranging from $1 million to $200 million, and backs them with more than $2.14 billion in assets. The company can provide flexible financing schedules, to make capitalization possible for its clients. It’s been a profitable approach; Hercules boasts a strong return on its investments, on average 5.9%. This has propelled the stock to a 73% gain in the past 12 months.
In its recent 3Q21 report, Hercules showed an EPS of 33 cents. This was in line with its performance over the last 7 quarters, when EPS has ranged between 30 cents and 37 cents. At the same time, the company announced a dividend of 40 cents per common share. This was the highest dividend payment since February of 2020. The current dividend is made up of a regular payment of 33 cents per share – up one cent from last quarter, and matching EPS – and a special payment of 7 cents. At an annualized rate of $1.60, the dividend is yielding 7.4%.
Crispin Love points out the strength of the dividend here when he writes: “We recognize that the increase is only a penny, but we believe the increase is more symbolic as the company has recently only adjusted its supplemental distribution rather than making any changes to the regular distribution. This is the first increase to HTGC's regular distribution since 2Q19. We are pleased to see the increase as we didn't expect any changes to the distribution until early 2022.”
Going on, the analyst adds, “We continue to believe that HTGC could announce a supplemental in excess of $0.28 in early 2022 given the significant earnings spillover that the company has been generating and will eventually need to pay out to shareholders.”
In line with these upbeat comments, Love rates HTGC shares an Overweight (i.e., a Buy), along with a $19 price target. (To watch Love’s track record, click here)
Are other analysts in agreement? They are. Only Buy ratings, 6 to be exact, have been published in the last three months. Therefore, the message is clear: HTGC is a Strong Buy. The yield, however, is the true attraction here.(See HTGC stock analysis on TipRanks)
Ellington Financial (EFC)
The second dividend stock we're looking at is Ellington Financial, a real estate investment trust (REIT). These companies are well known for their reliable and high dividend payments. Ellington takes a wide-ranging approach to the REIT niche, investing in commercial and residential mortgage loans, equity investments, and mortgage-backed securities.
Ellington’s shares have rebounded strongly from the height of the COVID crisis last year. In the last 12 months, stock has gained a 55%, outpacing gains on both the S&P 500 (39%) and the Dow Jones (33%) in the same period.
Turning to earnings, the company has seen its EPS fall off in the past several quarters, dropping from a high of $1.44 in 4Q20 to 75 cents in 2Q21, the last reported quarter. The 2Q21 EPS is also down 10 cents from the year-ago quarter. The earnings are supporting the dividend, however, which was paid out at the end of October at 15 cents per share. The dividend is paid out monthly, so it annualizes to $1.80. At this rate, the forward yield is a strong 9.9%.
In October, the company took advantage of its relatively high share value to raise funds through a public offering of common stock. In that offering, Ellington raised $91.3 million in gross proceeds, after selling 5 millions shares.
Covering Ellington for Piper Sandler, Crispin Love takes a holistic views, saying, “…we weren't terribly surprised that EFC is raising capital given the company's history of doing so at or near book value. We believe that this offering should continue to support growth for EFC's credit and agency portfolios in 2021 and into 2022... the pillars of our thesis remain with book value protection, core earnings covering the dividend, and growth opportunities.”
To this end, Love rates EFC an Overweight (i.e. Buy) along with a $19.50 price target.
Ellington Financial’s Strong Buy consensus rating is another unanimous vote by the Street, based on 4 positive reviews. Yet, the real attraction for investors here is the strong dividend yield. (See EFC stock analysis on TipRanks)
Ellington Residential Mortgage (EARN)
Last up on our list is another REIT, Ellington Residential Mortgage. This company, like the similarly named EFC above, is an affiliate of the Ellington Management Group; it differentiates itself by the focus of its real estate portfolio. EARN has built its investments around the acquisition and management of residential mortgage and real estate assets. The company’s main focus is on residential MBSs with principal and interest guarantees by US Government agencies or US Government-sponsored entities.
Getting Uncle Sam to back you up is a nice gig, if you can swing it. It’s kept EARN profitable, with Q2 EPS this year of 37 cents and top line quarterly revenue of $12.9 million. The Q3 numbers are scheduled for release November 2; we’ll see then if the company meets or beats the 33-cent EPS forecast. In the past four quarters, EARN has beaten the estimates twice.
With its October dividend payment, EARN has made a change to its dividend payment policy. The Q3 payment was made in September, at 30 cents per share; for October, the company has switched to a monthly format, while keeping the overall rate the same. In other words, EARN paid out a 10-cent dividend in October, and plans to pay monthly going forward. the current monthly rate, the dividend annualizes to $1.20, and yields a robust 9.8%.
Writing the Piper Sandler note of EARN, Crispin Love says: “We have covered EMG's credit focused vehicle Ellington Financial since 2017, so we are very familiar with the management team. Agency mortgage REITs are interest rate sensitive and while there are concerns regarding higher rates and Fed tapering, we believe EARN's risk/reward is attractive for investors given the company's valuation relative to peers and other factors.”
Love rates EARN as Overweight, and gives the shares a $12.50 price target. (To watch Love’s track record, click here)
Overall, analysts are unanimous on this one; based on Buys only – 3, in total – this Stock boasts a Strong Buy consensus rating. Shares are trading for $12.19 and have an average target price of $12.5. As is not uncommon with high-yield dividend payers, the return here is in the distributions. (See EARN stock analysis on TipRanks)
To find good ideas for dividend stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched 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.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.