Are we running with the bulls? The three main indexes, the Dow, the S&P 500, and the NASDAQ, are all at or near their all-time highs. They’re experiencing a run-up after a ‘September swoon’ that reversed in early October. The key point here is not so much the market lows or highs, but the volatility it’s been experiencing in getting there. Sharp swings within a general trend make it difficult to predict the market’s short-term moves.
The natural play to counter market volatility is to shore up the portfolio’s defensive posture – and that will bring investors’ attention to dividend stocks. Dividends provide a ready income stream, and the best dividend stocks keep that income stream reliable no matter how the markets shift. It’s a win-win, and a careful allocation of dividend stocks can be used to mitigate the risk inherent in stock investing.
With this in mind, we wanted to take a closer look at two high-yield dividend stocks earning a round of applause from JMP’s stock analysts. Using TipRanks’ database, we learned that both share a profile: a Strong Buy consensus rating from the Street’s analyst corps and a reliable dividend yielding at least 7%. Let’s see what JMP has to say about them.
Ares Capital Corporation (ARCC)
First us is Ares Capital, a business development company (BDC) and asset manager based in New York City. Ares is one of the many specialty finance companies working with a small- and mid-market commercial clientele, providing a combination of capital, credit, and financing to companies that may not qualify for services from the major banks. These small- and mid-sized enterprises have long been recognized as major drivers of the US jobs market, and BDCs like Ares play an important role in keeping them healthy.
Ares makes its money on the return from its investments in loans and equity, a portfolio valued at $17.7 billion and that includes investments in over 371 different companies. While Ares is based in New York, its clients represent a broader swath of the US, with ~77% of them coming from the Midwest, the West, and the Southeast. The portfolio leans heavily toward senior secured loans, with 49% of the total being first lien, and 23% being second lien. The two largest sectors that Ares invests in are Software & Services, at 19.3% of the portfolio, and Health Care Services, at 12%.
Over the past year, Ares has seen gains in both share value and quarterly revenues, along with steadily profitable earnings. The stock has gained ~70% over the past 12 months, while the quarterly revenues are up 72% year-over-year. The top line has shown sequential increases in each of the last three quarters, to reach $563 million in Q3. EPS came in at 47 cents, beating the 45-cent estimate. And of interest to dividend investors, the company declared a 41-cent dividend per common share.
This was the second quarter in a row with the dividend at this level; last quarter, it was raised from 40 cents per common share. For the past several years, the dividend has been kept steady in the range between 40 and 42 cents per share. At the current rate, it annualizes to $1.64 per common share and gives a yield of 7.56%. This compares favorably to the 1.5% the 10 year Treasury bond is currently yielding.
5-star analyst Devin Ryan covers Ares Capital for JMP, and he makes sure to note the company’s commitment to the dividend in his report: “We note that the company had $1.06/share of undistributed taxable income at year-end 2020 that supports management’s goal of maintaining a steady dividend through varying market conditions.”
Looking at Ares’ general position, Ryan writes, “The company continues to benefit from industry-leading sourcing networks, significant scale with strong liquidity, and a cost-efficient funding profile amid a favorable market backdrop. In our view, management has a long-standing track record of positioning the firm to meet the demand of larger borrowers for a scaled and well-capitalized capital provider with flexible financing solutions. We expect Ares Capital to outperform as it benefits from its position as a leading direct lender.”
In line with these comments, Ryan rates ARCC an Outperform (i.e. Buy) along with a $23 price target. Based on the current dividend yield and the expected price appreciation, the stock has ~15% potential total return profile. (To watch Ryan’s track record, click here)
Overall, there are 7 ratings on Hess Midstream, and they include 6 Buys and 1 Hold, for a Strong Buy consensus from the analysts. (See ARCC stock analysis on TipRanks)
Granite Point Mortgage (GPMT)
The second dividend stock we’ll look at, Granite Point Mortgage, is a real estate investment trust (REIT). These companies invest in various forms of real estate, either through direct purchase, ownership, management, and leasing; through financing and purchase of mortgage-backed securities; or through a combination of both. Granite Point has built its portfolio on senior floating-rate commercial mortgage loan, along with other debt-like commercial real estate investments. The company invests in long-term, fundamental value-oriented assets.
Granite Point will report its 3Q21 earnings on November 8, but we can get a good idea of the company’s position by looking at its Q2 numbers. The company reported 29 cents per share in distributable earnings; this was up 16% from the 2Q20 result, but was down from 38 cents in Q1. Total revenue came to $49.45 million; the top line has been gradually falling off since its peak at $64.8 million 4Q19.
Despite the fall-off in revenues, Granite Point’s shares have surged in the last 12 months. The stock has more than doubled in that time, gaining 119%.
Regarding the dividend, Granite Point has a 5-year history of reliable payments, and a policy of keeping the dividend in line with distributable earnings. The company in September declared the Q3 dividend, paid in October, of 25 cents per common share. This annualizes to $1, and gives a yield of 7.5%. The company also has an active stock buyback program, and repurchased one million shares during the second quarter.
JMP 5-star analyst Steven Delaney notes that Granite Point is moving past pandemic-related difficulties, and writes, “As Granite Point closes the book on some of the COVID-19-related financing/ warrants and reached resolution on certain ‘Watch List’ problem loans, we believe the company has resolved some near-term headwinds and risks. This progress is further highlighted by new loan originations having been restarted in the second quarter with the lending momentum continuing through the back half of this year.”
Delaney goes on to add that the company has strong prospects for increasing its return to investors: “Given the improving economic outlook driven by COVID vaccines and the recent loan resolutions, we are modeling a dividend increase from GPMT of two cents or 8% to $0.27 for December 2021 and another increase to $0.28 per quarter in 2Q22.”
To this end, Delaney rates GPMT an Outperform (i.e. Buy) along with a price target of $15. His target, combined with the dividend yield, implies a potential total return of 21% from current levels. (To watch Delaney’s track record, click here)
Overall, the Strong Buy analyst consensus on Granite Point’s shares is unanimous, based on 3 positive reviews set in recent weeks. (See GPMT 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.
