2 ‘Strong Buy’ Dividend Stocks Yielding at Least 8%
TipRanks
7 min read
The sell-off is showing no signs of letting up, as the NASDAQ tumbled another 2.84% today, the S&P 500 has fallen 2.11%, and the Dow has shed just over 1.5%. It’s a rout, with the indexes testing new lows and moving deeper into the bear territory.
The fall comes as investors are shifting sentiment on the Federal Reserve’s anti-inflationary moves. They are not exactly disapproving – but they are reconciling to the idea that we’re in for a hard landing, and that the Fed’s projected 4.6% peak interest rate simply won’t be enough to tame 8%+ inflation. The Fed has been moving aggressively, with five rate hikes so far this year, and the last three of those have been at 75 basis points each. But it’s looking like more will be needed – and according to billionaire investor Stanley Druckenmiller, that’s likely to tip the economy into a deep recession.
Druckenmiller, who is well known for his role in the execution of George Soros’ famous ‘breaking’ of the Bank of England in 1992, when he bet $10 billion against Sterling and won, is expecting a US economic recession next year.
“I will be stunned if we don't have recession in '23. I don't know the timing but certainly by the end of '23. I will not be surprised if it's not larger than the so-called average garden variety… You don't even need to talk about black swans to be worried here,” Druckenmiller noted.
For plenty of investors, days like this will prompt a move into defensive stocks, and few stocks are more defensive than high-yielding dividend payers.
With this in mind, we’ve opened up the TipRanks database to find details on two dividend stocks that are yielding 8% or better, rates high enough to provide some protection against inflation. Here they are, presented with commentary from the Street’s analysts.
We'll start in the energy industry, a sector that is rarely short of cash for distribution. Energy Transfer is a midstream company in the North American market, and one of the continent’s largest such companies, at that. ET claims some 120,000 total miles of energy infrastructure, capable of moving approximately 30% of the total US natural gas and crude oil. The company’s network is centered mainly in the Texas-Louisiana-Oklahoma region, but also extends east to Florida, northeast to the Great Lakes, and from there east through Pennsylvania and the mid-Atlantic.
The profitability of ET’s network is clear from the recent 2Q22 earnings results. The company had a net income of $1.33 billion, an increase of $700 million year-over-year, or 90%. On a per share basis, the net income translated to an EPS of 40 cents.
Net income was good, but the company’s distributable cash flow was better. For the second quarter of 2022, ET had a DCF of $1.88 billion, up a solid $500 million from the year-ago quarter. This is the source of the company’s dividend, so the increase is important. ET set its most recent dividend, for the second quarter of the year, paid out in August at 23 cents per common share.
ET has raised the dividend in each of the past three quarters, and the latest one represented a 15% increase. The current payment of 23 cents gives an annualized rate of 92 cents, and yields 8.3%. This yield matches the current rate of inflation; investors can use this dividend to provide a stronger level of protection against the effects of price inflation.
Writing from Raymond James, 5-star analyst Justin Jenkins takes a strongly bullish stance on ET. He says of the stock, “ET’s yet-again-revised 2022 EBITDA guidance underscores improving fundamentals. Though tone towards growth spending remains aggressive, FCF generation is robust in our model – and the focus should be on attractively deploying excess FCF in 2H22+ (e.g., helping lessen the impact of the remaining equity overhang)... We see this as a compelling opportunity for entry into ownership of one of the better positioned MLPs to capitalize on the current environment."
Along with his commentary, Jenkins gives ET shares a Strong Buy rating, and his price target of $15 indicates potential for an upside of ~37% over the next year. Based on the current dividend yield and the expected price appreciation, the stock has ~45% potential total return profile. (To watch Jenkins’ track record, click here)
Overall, there are 5 recent analyst reviews on the shares here, and they all agree that this is one to buy, making the Strong Buy consensus rating unanimous. The stock has a trading price of $10.97 and an average price target of $15.20, implying a one-year upside of ~39%. (See ET stock forecast on TipRanks)
From the Energy world, let’s shift our focus to real estate investment trust (REIT). These firms have long been recognized as ‘dividend champs,’ and Innovative Industrial Properties puts a so-far unique twist on the sector: the company focuses on the acquisition, ownership, operation, leasing, and management of properties for the expanding US cannabis industry. Commercial-grade cannabis requires some serious grow facilities, heavy on both land and infrastructure, and IIRP has exploited that to create its niche.
And it’s quite a niche. By the start of September this year, the company's portfolio held 111 properties in 19 states, and these properties had an aggregate of 8.7 million rentable square feet, a figure that includes some 2.1 million square feet under development. Proceeds from these properties generated Q2 revenues of $70.5 million, for a 44% year-over-year increase.
Solid revenues led to solid results in two key metrics for dividend investors. First, the company ran a profit, with net income of $40 million, or $1.42 in diluted EPS. Along with this, the company had adjusted funds from operations (AFFO) of $60.1 million, which came out to $2.14 per diluted share. These results meant that IIPR’s dividend is affordable – and in fact, management raised the dividend payment in the most recent declaration.
The new div payment, of $1.80 per common share scheduled for payment on October 14, is up 25% y/y, and at its annualized rate of $7.20, it yields 8.1%. At that yield, it almost matches the rate of inflation.
IIPR recently settled a dispute with a major tenant, and Compass Point analyst Merrill Ross sees that as a supportive factor in the dividend.
“The company entered into a conditional, confidential settlement with its California tenant that has been in default of its lease terms since July, and the company increased its quarterly dividend from $1.75 to $1.80. We think the increase in the dividend sent a signal that management is confident of its ability to collect lease payments from its tenants, though we note that we do not know the terms of the conditional settlement," Ross opined.
"Because this contract in particular seems to be enforceable and because the tenant agreed to the settlement ostensibly because the properties are essential to their operations, we are making the generous assumption that each of the other leases, not only in CA but throughout IIPR's portfolio, will prove enforceable," the analyst added.
Moving forward, and putting her optimism into a quantifiable form, Ross rates IIPR shares as a Buy with a $175 price target that implies ~99% one-year upside potential to the stock. (To watch Ross’s track record, click here)
What does the rest of the Street think? IIPR has picked up 8 recent reviews from the Wall Street analysts – and they break down 6 to 2 in favor of Buys over Holds, for a Strong Buy consensus rating. Shares are trading for $88.09, and their $161.83 average target implies a one-year upside of ~84%. (See IIPR stock forecast 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.
