The market’s main indexes have all hit record levels in recent sessions, with the S&P 500 climbing over 4,600 and the NASDAQ up past 15,800. These are nosebleed heights, enough to make investors dizzy.
Watching the markets for Bank of America, US quantitative strategist Savita Subramanian is using current data and historical patterns to predict what’s ahead – and what she sees should counsel caution for investors.
Using a range of data points, including normalized earnings, risk free bond yields, expected long-term inflation, the equity risk premium, corporate cost of capital, and the forward-going price to earnings ratio, Subramanian comes to the conclusion that current fair valuations for the US equity market is simply too high. In fact, she estimates that the benchmark S&P 500 index is overvalued by as much as 35%. At this valuation level, Subramanian is predicting a 10-year stretch of negative average annual returns, on the order of a half-percent per year.
A long-term run of negative average returns presents the classic case for defensive stocks, and the BofA strategist doesn’t shy from that, writing, “We see dividend preservation and growth as the single most important criteria for stock selection.” As for investors’ positions, Subramanian believes that a strong dividend stance “could potentially be the difference between a flat-to-negative and positive return over the next 10 years.”
With this in mind, we’ve used TipRanks’ database to pinpoint two high-yield dividend payers. These are companies whose dividends yield 6% or better – and better, they have long-term histories of keeping the payment reliable. Let’s take a closer look.
Stellus Capital (SCM)
We’ll start with a specialty finance company, Stellus Capital. This is one of the many companies that provide access to credit and capital for the small- to mid-market enterprises that make up an important part of the US economy. Stellus has been in business for over 18 years, and over that time has deployed over $7 billion in credit and equity investments. The company’s current portfolio has 75 active investments, and Stellus’s cumulative record includes over 290 completed investments. The company currently has over $2.1 billion in total assets under management.
Since bottoming out in the pandemic crisis of mid-2020, Stellus’ stock has been steadily rising. In the past 12 months, the shares have gained 75% and are now trading above their pre-COVID level. Concurrent with the share price recovery, Stellus’ earnings have also climbed back to their pre-COVID level. The Q3 EPS result was 31 cents; this was up almost 7% from the year-ago quarter, and is only 1 cent off the 32-cent EPS reported in 4Q19. The Q3 revenues, of $24.9 million, were the highest in more than 2 years.
These solid revenue and EPS results support the company’s dividend, which was declared for the current quarter at 28 cents per common share. Along with that regular dividend, the company is also paying out a special dividend of 6 cents per share in the quarter. The special dividend is paid monthly, at 2 cents per month. The regular payment along annualizes to $1.12 per share, and gives a yield of 8%.
5-star analyst Robert Dodd, in his coverage of SCM for Raymond James, sees this company in a generally sound position going forward.
“3Q21 results were strong— with earnings ahead of RJe and consensus, and NAV/share growth even after a double dividend impact. We now also project modest quarterly supplementals through our forecast period beginning in 1Q22 — we continue to see an attractive risk/reward,” Dodd noted.
This bullish stance supports Dodd’s Outperform (i.e. Buy) rating on the stock, and his $15.50 price target implies an upside of 13.5% for the next 12 months. Based on the current dividend yield and the expected price appreciation, the stock has ~21% potential total return profile. (To watch Dodd’s track record, click here)
Overall, there are 2 recent reviews on this stock – and both are positive, giving SCM a Moderate Buy consensus rating. The stock’s current trading price is $13.85 and the $15.25 average price target suggests a potential one-year upside of ~12%. (See SCM stock analysis on TipRanks)
BrightSpire Capital (BRSP)
From specialty finance we’ll shift over to the world of REITs, or real estate investment trusts. These companies invest in real properties, as well as mortgages, mortgage-backed securities, and property loans. BrightSpire describes itself as an internally-managed commercial real estate credit REIT. The company’s focus is on the origination and acquisition, as well as the financing and management of a diverse commercial real estate debt and net lease portfolio. The company’s investments are mainly in the US, but there is a 9% exposure to European commercial real estate.
BrightSpire’s portfolio is comprised of 83% loans, 13% net lease and other real estate, and 4% commercial real estate debt securities. A majority of the properties – 39% and 37%, respectively – office space and multifamily dwellings, and the geographic distribution leans 44% toward the US West. The second-largest portion, 19%, is in the Southwest, and another 18% is in the Northeast. The portfolio is valued at $4.3 billion, and totals 75 loans at present.
Like SMC above, this stock has seen its share value make strong gains in the past year. The shares are up an impressive 99% in 12 months, far outpacing the broader markets.
During the worst of the COVID crisis, BrightSpire suspended its dividend, which it had been paying monthly. In March of this year, however, the company reinstated the dividend as a quarterly payment. The Q1 dividend was set at 10 cents per common share, and it has gone up since then. In Q2 it was 14 cents, and for Q3 the dividend has risen to 16 cents. At that rate, it annualizes to 64 cents per common share and gives a healthy yield of 6.4%.
Stephen Laws, another of Raymond James’ 5-star analysts, writes of BrightSpire: “Since COVID, BRSP has largely focused on monetizing legacy investments and redeploying capital into newly originated senior loans. While a few legacy investments remain, we believe the resolutions have largely been completed and expect BRSP to increase focus on growing the investment portfolio. We expect the portfolio growth to drive earnings and dividend growth in 2022.”
Laws’ comments back up his upgrade on the stock, from Market Perform (i.e. Hold) to Outperform (i.e. Buy). His price target, at $12.50, suggests room for ~27% upside potential in the coming year. (To watch Laws’ track record, click here)
Once again, this is a stock with a Moderate Buy consensus view based on 2 positive stock ratings. The average price target of $12 implies a 20% upside from the current share price of $9.98. (See BRSP 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.
