Market watchers want to know what exactly is in store for the rest of this year, after the S&P 500 has been hitting record high levels. While sentiment is running high for now, the long run may be clouded – at least in the opinion of B. Riley’s chief investment strategist Paul Dietrich.
The strategist is predicting that this year will see a recession, possibly mild, possibly worse, but a market turndown that could lead to a crash of 40% on the S&P index. A drop of that magnitude would put the index near 3,000, a level it last saw in mid-2020. In a recent interview, Dietrich tied his forecast to the recent gains, saying, “We’re still on the path to recession. We’re so overvalued now in the market.”
Backing this downbeat outlook, Dietrich notes several additional factors, including the strong chance that inflation simply won’t get back down to the Fed’s 2% target rate, and that the record-high level of consumer credit card debt, $1.13 trillion, a figure that is nearly maxed out, will at some point require repayment.
A smart investor will always have a plan for the worst case – and this scenario will naturally draw attention to dividend stocks. These shares generate an income stream no matter how the market rises or falls, and the best give yields that far exceed inflation.
With this in mind, we’ve opened up the TipRanks database, and found div stocks with ‘Strong Buy’ ratings from the analysts that are yielding at least 10%, a solid return at any time. Here are the details on two of them.
Dynex Capital (DX)
First up is Dynex Capital, a REIT, or real estate investment trust, that targets its business on mortgage loans and related securities. The company invests mainly in mortgage-backed security instruments (MSBs), both agency and non-agency, primarily in the residential market but also on the commercial side. In addition, Dynex also has a sizable position in mortgage loans, for commercial properties and for securitized single-family residential properties.
In assembling its portfolio, Dynex follows a few simple strategic rules. The company starts by committing to a healthy return, and uses risk management techniques to maintain its portfolio’s strength. Dynex follows these rules to preserve its capital, and to ensure a disciplined allocation of the same. Of particular importance for dividend investors, Dynex incorporates a high-yield div payment into its capital return strategy.
The dividend is worth some extra notice. Dynex pays out monthly, making its dividend of note to investors seeking a regular income for practical purposes, and the company has held to a long-term policy of keeping the dividend both reliable and stable. The current payment, of 13 cents per common share, was last paid out on March1st; the dividend has been held its current rate since mid-2020. With an annualized rate of $1.56 per common share, Dynex’s dividend payment offers an impressive yield of 12.6%.
We should point out that Dynex’s dividend is fully covered by the company’s current income. In the company’s 4Q23 earnings results, Dynex showed a comprehensive EPS income of $1.44, supporting a net income of $0.39 per common share.
Analyst Eric Hagen covers this stock for BTIG, and he is upbeat on the company’s potential to realize increased earnings later this year should the Fed start bringing down interest rates. Hagen writes of this company, “[DX] remains our favorite way to be long the theme of the Fed cutting rates and the yield curve steepening. We currently estimate economic returns could improve by +200 bps for every 25 bps reduction in funding costs, and right now we expect essentially all of the drop in Fed funds to get transmitted to MBS repo rates. We could envision some capital raising taking place near-term with scale objectives in mind, at the same time we expect its valuation should be more tolerant of higher leverage, especially compared to Agency REITs with more prepayment risk.”
Looking ahead, the analyst rates DX shares as a Buy, with a $15 price target to suggest a one-year upside potential of more than 21%. With the dividend yield, the total return could exceed 33%. (To watch Hagen’s track record, click here)
The Strong Buy consensus rating here shows that the Street shares the bullish outlook on this stock – and it is unanimous, based on 4 recent positive analyst reviews. The stock is selling for $12.38 and its $13.75 average target price implies a 12-month gain of 11%. (See DX stock forecast)
Franklin BSP Realty Trust (FBRT)
Next up on our list of high-yield dividend payers is another REIT, Franklin BSP. This company works in the commercial real estate space, focusing on commercial real estate mortgage debt. Franklin’s portfolio consists of CRE debt instruments that the company has either originated or acquired, mainly first mortgage loans on commercial properties in the US. In addition, Franklin diversifies its portfolio with investments in subordinate loans, mezzanine loans, and securities. Franklin’s portfolio also crosses geographic boundaries, for added diversification.
When it comes to loan origination, Franklin takes a flexible approach. The company will make loans on a wide range of scales, from $10 million to $250 million, and will allow borrowers to mortgage up to 80% of the value of the property involved. The company’s commercial loans are typically set for 3 to 5 year terms on transitional loans, or as long as 10 years for stabilized loans. Franklin will work with customers on loans for all types of commercial real estate.
Turning to the financial side, we find that Franklin generated revenues of $263.95 million in 4Q23, the last quarter reported. That figure was up more than 27% year-over-year, but missed the forecast by over $4 million. The company’s distributable earnings, which support the dividend payment, came to $1.92 per common share, up 85 cents year-over-year and in-line with the pre-release expectations.
And now we get to the main event for dividend investors. Franklin has been paying out a cash dividend since 2021, and last sent out the payment on January 10 of this year. That payment was set at 35.5 cents per common share, the eighth quarter in a row at that level; the annualized dividend rate of $1.42 per share gives a robust yield of 11%.
For JMP’s analyst Steven DeLaney, there are a few key points here. One is the defensive quality of Franklin’s loans, and another is the resulting performance of the portfolio. As DeLaney goes on to say, “Franklin BSP Realty Trust has built a defensive loan portfolio, with 78% of loans backed by multifamily properties and over 80% of loans in SE or SW markets, which has resulted in superior credit performance relative to most peers. Additionally, the company recently completed a new CRE (commercial real estate) CLO (collateralized loan obligation) that offers attractive non-recourse financing with an 18-month reinvestment period.”
Quantifying his stance, the analyst rates FBRT as Outperform (Buy), and he puts a $15 price target on the stock to show his confidence in a one-year upside of nearly 16%. Add the dividend yield, and the stock’s total one-year may reach 27%. (To watch DeLaney’s track record, click here)
All three of the recent analyst reviews here are positive, giving FBRT shares a unanimous Strong Buy consensus rating. The stock’s average price target is $15, matching the JMP view. (See FBRT stock forecast)
To find good ideas for 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.
