With gasoline prices skyrocketing to record highs, inflation at 40-year highs, and last year’s stock market boom that has turned into an outright bear market, it’s no wonder the world of finance and business is acting like a repeat of The 70s Show. looks .’ Market watchers recall that the bad times of the late ’70s and early ’80s were only tamed when Fed Chairman Paul Volker triggered a recession with interest rates nearly 20% down — and for investors under 45, just note that the first quarter this year recorded an increase of 1.5%. GDP contraction. Should Q2 show the same, it would mean that we are already in for a recession.
The debate so far has focused on how deep the next recession is likely to be and when exactly it will begin. For now, the consensus seems to be that a mild recession is in store, along with higher interest rates, likely through year-end.
However, chief US equity strategist Mike Wilson, writing for Morgan Stanley, is taking a much more bearish stance, forecasting a deeper and more dangerous recession than most would let on. Noting that the recent move lower has made the S&P “fairer,” Wilson continues, “In our view, the risk of a recession is not being priced in, which is 15-20% lower, or around 3000. The bear market will not be over until the recession comes or the risk of a recession has passed.”
Such a market environment calls for defensive action — and that, of course, will make you consider dividend stocks. Reliable, high-yield div payers ensure a steady stream of income, guaranteeing a return even when stock markets fall and even when the bear market is deeper than expected.
With that in mind, we used the TipRanks database to identify two stocks that fit a solid defensive profile: a strong buy in the analyst’s collective wisdom, and a dividend yield of 8% or more. Let’s take a closer look.
Starwood property (STWD)
We’ll start with a real estate investment trust, or REIT, a class of companies that have long been known for their high-yield dividend payments. Starwood Property, with offices in New York and Greenwich, San Fran and LA, and London, has a $24 billion portfolio of commercial, residential, infrastructure, investment and services loans. Multifamily is the largest single property type in the portfolio, accounting for 32% of total commercial real estate loans. The company is one of the largest commercial lenders in the US real estate sector.
All of that can bring home the bacon, and Starwood is doing just that. The company ended Q1’22 with GAAP net income of $1.02 per diluted share. This resulted in distributable earnings per share of 76 cents for 1Q22, an increase of 52% over 1Q21. Starwood’s total revenue for the first quarter was $225 million.
For dividend investors, that provides a solid base for paying 48 cents per common share. Starwood has maintained this payment at current levels since 2014 and has not missed a dividend payment since it began paying out in 2010. At current levels, the annual dividend comes in at $1.92 per common share and yields a solid 9.1%. It’s important to note that Starwood’s dividend exceeds the current rate of inflation (8.6% reported for May), giving the stock a positive real yield in today’s conditions.
Wells Fargo analyst Donald Fandetti monitors this stock and notes that the first quarter of the year was “another strong quarter for the company.” Fandetti continues: “They continue to differentiate themselves by generating returns on investments on top of growing net interest income. As a commercial mortgage REIT focused on adjustable-rate lending, earnings would rise 11 cents annually if the Fed hiked rates by 200 basis points. We also see room for STWD to increase its quarterly dividend and/or pay a special dividend later in its year.”
“We expect origination activity to remain healthy for the foreseeable future as lending opportunities abound from the pandemic. We believe the portfolio is well positioned even as we enter an economic slowdown,” added Fandetti.
All in all, good news for dividend investors. Fandetti’s comments reiterate his overweight (ie, Buy) stance on Starwood Property stock, while his $29 price target implies ~37% 1-year upside potential. (To see Fandetti’s track record, click here)
Wells Fargo is hardly the only institution taking an optimistic stance on Starwood Property; The stock has 5 recent analyst ratings and they are unanimously positive for a Strong Buy consensus rating. The stock trades for $21.17, and its average price target of $28.60 suggests it has room for a 35% upside move over the next 12 months. (See STWD Stock Prediction on TipRanks)
Enterprise Products Partner (EPD)
From REITs, we now turn to energy stocks, another sector known for returning profits to shareholders via dividends. Enterprise Products is a midstream company, one of many operators in the energy sector that transport products – crude oil, natural gas and natural gas liquids – from the wells to tank farms, refineries and transfer/export terminals.
Enterprise controls a network of assets, including natural gas and crude oil pipelines, storage facilities, and processing facilities that do that work. The company’s network stretches from the Appalachian gas fields through the Great Lakes region to Texas and the Gulf Coast up into the Rocky Mountains. Midstream at this scale is an important business, and Enterprise has a market cap of around $53 billion. Year-to-date, the company’s stock is up 14%, a significant outperformance compared to the S&P 500’s 21% year-to-date loss.
In recent months, Enterprise has taken steps to both expand and streamline its business. On the expansion side, in April the Company signed a Memorandum of Understanding with Oxy Low Carbon Ventures to participate in a joint carbon dioxide (CO2) transportation and capture project on the Texas Gulf Coast.
On the streamlining side, and also in Texas, Enterprise struck an agreement with Magellan Midstream Partners that would allow two of the company’s crude oil terminals — Magellan East Houston and Enterprise Crude Houston — to transfer certain barrels of crude oil between the terminals at no cost. The agreement applies to certain pipeline deliveries and only to crude oil whose buyer has not specified a preferred terminal delivery.
Enterprise posted a massive year-over-year increase in revenue in the first quarter of ’22, a gain partly due to higher hydrocarbon prices. Revenue was just over $13 billion, up 41% year over year. Net income attributable to shareholders was $1.3 billion, or 59 cents per diluted share. The company’s distributable cash for Q1 2022 was $1.8 billion and Enterprise increased its distribution payment on common stock (their name for the dividend) from 45 cents to 46.5 cents. Enterprise kept the dividend at that level for the Q2 statement.
At 46.5 cents per common share, the dividend has an annualized payment of $1.86 and an 8% yield. This compares favorably to the ~2% yield in S&P-listed companies and the ~3% yield in the US Treasury market.
In reporting for investment firm Stifel, analyst Selman Akyol points to several bullish factors when he writes, “EPD’s petrochemicals business continues to exceed expectations as its size has increased over the years and its ability to generate spreads. While spread cash flows can be seen as more volatile relative to its fee business, we believe this demonstrates the value of EPD’s extensive footprint. We continue to favor Enterprise for its asset base, attractive financial profile and reliable distribution.”
Akyol is using these comments to back up a Buy rating on EPD while giving the stock a $33 price target. Should that target be met, a 12-month gain of ~37% could be on the horizon. (To see Akyol’s track record, click here)
Judging by the consensus breakdown, other analysts agree. 12 buys and 2 holds add up to a strong buy consensus rating. The shares have a current trading price of $24.08 and their average price target of $31 implies a gain of ~29% from this level over the coming year. (See EPD Stock Prediction on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is for informational purposes only. It is very important that you do your own analysis before making any investment.