We have seen two conflicting trends in the markets this year – a steep decline, in bear territory, in the first five months and a strong rally since early June. Both trends have been overlaid by heightened volatility, creating a confusing market environment even as the market rebounded.
Along with the unpredictable stock market, we’ve had to deal with inflation at 40-year highs and rapidly rising interest rates as the Federal Reserve tries to put the brakes on prices. The result is predictable, and probably already here: a recession. How painful it will become is still up in the air.
At least one market expert believes the worst is yet to come. Mike Wilson, chief U.S. equity strategist at Morgan Stanley, has been consistently bearish all year and hasn’t changed that tune despite the current rally.
“Last month’s stock rally was strong and got investors excited that the bear market is over and looking forward to better times… We think it’s premature to be completely clear on the recession and therefore the risk to earnings is still high. For these reasons, we have remained defensively oriented in our equity rankings,” Wilson said.
A defensive orientation will naturally lead investors to dividend stocks. These income-producing stocks offer some degree of protection from both inflation and stock depreciation by providing a steady stream of income.
Against this background, some Wall Street analysts gave the thumbs up to two dividend stocks that yield no less than 13%, or better. Opening up the TipRanks database, we dug into the details behind these two to find out what else makes them compelling buys.
Diana Shipping (DSX)
The supply chain has been in the news lately, for all the wrong reasons – including backups at major ports around the world. The first stock we’ll look at, Diana Shipping, is a company that has had to address these issues head on and has done so successfully. Diana Shipping is a major ocean dry bulk carrier with a fleet of 35 vessels totaling approximately 4.5 million dry tons. These ships, with an average age of 10.5 years, operate worldwide, carrying the bulk cargoes on which the global economy depends, such as iron ore, grain and coal.
Diana reported total charter revenue of $74.5 million for 2Q12, up 58% from the $47 million recorded in 2Q11. Over the past year, the company has gone from net losses to net profits. Income attributable to shareholders in the second quarter of this year was $58.8 million, compared to a net loss of $1.4 million last year. Profits come from business growth as economies reopen. Diana also benefits from its high fleet utilization rate, with vessels at sea chartered 99.1% of the time.
Looking at the company’s earnings on a per-share basis, we find that Diana reported a diluted 2Q EPS of 42 cents, a far cry from the 2 cents reported in the year-ago quarter. Strong earnings gave the company confidence to declare a dividend of 27.5 cents per common share. Diana paid a dividend in the early 2000s but stopped it in 2008. The payment was reinstated in the autumn of last year and the current statement, due on August 19, will be the fourth since the dividend was resumed – and the third consecutive increase in dividend payout. At the current rate, the payout comes to $1.10 per common share on an annualized basis and yields 17.7%.
5-star analyst Benjamin Nolan, who covers Diana for Stifel, sees the company well positioned to continue generating profits. Summarizing his thoughts on the stock, he writes: “DSX posted another quarter of increased earnings as it continued to benefit from a recovery in the dry bulk market due to tight supply and increased ton-mile demand. With no capex, low leverage and a good accumulated cash flow, they further increased their dividend this quarter to $0.275/share. Importantly, we don’t expect dividends to stay this high indefinitely, but we expect they should be at least $0.20/quarter by the end of 2023 which means healthy [13%] dividend yield as the company channels strong cash flow to shareholders… Given the risk-reward, we will remain buyers of DSX stock.”
A Buy Nolan rating on the stock comes with a $7 price target, indicating a one-year upside potential of 17% from current levels. Based on the current dividend yield and expected price appreciation, the stock has a ~35% potential total return profile. (To follow Nolan’s history, Click here)
In total, this small-cap shipping company has garnered 4 analyst reviews in the past few weeks – and they are unanimous that this is a buy stock, giving Diana a strong buy consensus. DSX shares are selling for $5.97 and the average price target of $7.65 suggests the stock will gain 28%. (See Diana Stock Prediction on TipRanks)
AFC Gamma (AFCG)
Now we’re going to switch gears and shift our focus from shipping to hemp. AFC Gamma provides financial services to cannabis companies, working to provide underwriting and financial diligence in a sector that must navigate a challenging regulatory landscape. In addition, AFC also offers real estate loans and other secured financial services to cannabis companies, which, due to the patchwork of legal regimes, may have difficulty accessing banks. AFC Gamma aims to drive growth in the legal cannabis sector, doing so while operating as a real estate investment trust (REIT).
The company will release its 2Q22 numbers next week, but we can get a feel for where it stands in the industry by looking back at 1Q22. In the first quarter, AFC Gamma generated $11.9 million in distributable earnings, or 62 cents per common share. This was up 44% from the year-ago quarter and marked the third consecutive quarter of consecutive EPS gains.
Rising earnings have fueled a rising dividend, and in June AFC Gamma announced its second-quarter payout at 56 cents per common share. This payment, sent on July 15, is annualized at $2.24 and gives a fixed yield of 13.7%. It is important to note that the payout is well below total distributed earnings, a clear sign that the dividend is sustainable at current income levels.
That’s one of the key points for this stock, in the eyes of JMP analyst Aaron Hecht, who writes for AFC Gamma: “We expect AFCG’s investment pace to slow as market volatility has weighed on the stock and management indicated that it is not interested in raising equity capital below the book. We see cannabis as a cyclically resilient asset class, similar to tobacco or alcohol, and equity provider stocks do not trade on fundamentals. We believe AFCG represents a unique opportunity here as the stock is currently performing [over 13%] and once management fully utilizes its capital, the yield could expand to 18%. At the very least, investors should be able to collect a huge dividend which we believe is sustainable.”
To that end, Hecht rates AFCG as Outperform (ie, Buy) and sets a $25 price target to go along with that rating. At current levels, his target implies a 53% one-year upside potential for the stock. (To follow Hecht’s background, Click here)
Looking at the consensus analysis, 3 Buy ratings and 2 Hold ratings have been published in the last three months. Therefore, AFCG receives a consensus rating of Moderate Buy. Based on the average target price of $22.81, shares could rise 40% in the next year. (See AFCG stock forecast on TipRanks)
To find good ideas for trading dividend stocks at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that brings together all of TipRanks’ stock information.
Denial of responsibility: The views 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.