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2 Big Dividend Stocks Yielding at Least 7%; Wells Fargo Says ‘Buy’
Stock Analysis & Ideas

2 Big Dividend Stocks Yielding at Least 7%; Wells Fargo Says ‘Buy’

What do you think of roller coasters? We may be in for one in 2022, with the markets showing higher volatility – and perhaps a lower net gain – than last year. Headwinds include rising inflation, the Fed’s likely actions to tighten monetary policy in response, and increased labor costs. Tailwinds may include that same Fed action, as it carries potential to blunt a ‘stagflationary’ period, and a likely political shift waiting in the fall.

Writing from Wells Fargo, senior equity strategist Christopher Harvey is expecting that the market will experience a correction, that is, a drop of 10%, by mid-year: “Pullbacks will likely be more frequent in this choppier equity market. Ultimately, the bend-but-not-break market mentality finally fails investors in 2022 in our view.”

Harvey’s view includes several causative factors, which he lists clearly, writing, “Labor costs accelerate as retirements accelerate and white-collar workers capitalize on the relatively low friction associated with working from home for another employer… Earnings continue to move higher, but multiples do not. A combination of decelerating growth, hawkish Fed, peak pricing, and a belief that longer term US growth has not improved drives multiple compression and frustrates bulls.”

At the same time, Harvey points out that the mid-term elections – which usually favor the party out of power – are setting up to be a smash-up for the Democrats and writes, “The GOP will gain control of Congress, adding perhaps two Senate seats and 25-30 House seats… This sets up a late-year rally as SPX history has favored Republican Senate control…”

For investors, the prospect of an uncertain and volatile market climate gives a clear impetus toward defensive positions, and that will naturally get them looking to dividend stocks. These are the classic plays to protect the portfolio from market pullbacks and volatility, and for good reason. A reliable dividend provides a steady income stream no matter where the market goes.

Using TipRanks’ database, we’ve pulled up the info on two dividend stocks that have gotten the thumbs-up from Harvey’s colleagues at Wells Fargo. These are high-yield payers – in the range of 7% or better – high enough to stay attractive even when the Fed starts raising rates. Here are the details.

Black Stone Minerals (BSM)

We’ll start with Black Stone Minerals, a hydrocarbon exploration and development company – which is really just a fancy way to say Black Stone buys land holdings in regions rich in oil and natural gas, and profits from the exploitation of those resources. The company’s land holdings encompass over 20 million acres across 60 production basins in 40 states, giving Black Stone a flexible portfolio of active assets.

The value of the holdings can be seen from the steadily rising top line. Black Stone has seen five consecutive quarters of sequential revenue gains, with the recent 3Q21 result, over $137 million, the highest in the past two years.

In production terms, Black Stone reported 33 million barrels of oil equivalent per day (MBoe/d) in Q3 royalty volume, up from 31.1 million in the year-ago quarter. Total production was reported at 38 MBoe/d.

The company’s solid production and royalty foundation gives it confidence to maintain its dividend payment. The most recent declaration, at 25 cents per common share, annualizes to $1 per share and gives a yield of 7.4%. This compares favorably to average div yield on the broader markets, which stands between 1.5% and 2%. Critically important, the dividend payment was higher than had been expected; it was composed of a regular dividend and a special distribution. The dividend was paid out in November, with the next payment likely in February.

Well Fargo analyst Joseph McKay takes a bullish stand here, based in part on the company’s sound performance, upbeat outlook, and high dividend.

“We think BSM’s 3Q21 update and positive forward revisions (the result of a conservative approach from management coupled with robust commodity prices) should offer the sort of tangible positives that have been building over the past few quarters,” McKay noted.

“With our and consensus expectations already ~1 mboe/d above the implied target and robust natural gas prices and an acceleration of development activity in the Haynesville setting up an attractive risk/reward for volumes moving forward, we see forward results biased to the upside… With the balance sheet in solid shape, in our view and an ~18% improvement to net debt in October, we see increased potential for distribution growth moving forward,” the analyst added.

McKay’s bullish comments support his Overweight (i.e. Buy) rating here, and his $14 price target suggests an upside of ~30% for the year ahead. (To watch McKay’s track record, click here)

Overall, Wall Street is ready to buy this stock. BSM has 5 recent reviews, featuring a 3 to 2 breakdown of Buy over Hold to back a Moderate Buy consensus view. The average price target of $16 is somewhat higher than the Wells Fargo view, and implies a one-year upside of 37% from the current share price of $10.80. (See BSM stock analysis at TipRanks)

Oaktree Specialty Lending (OCSL)

The second stock we’ll look at is a finance provider, facilitating loans and credit in the mid-market enterprise segment. This customer base frequently has difficulty accessing tradition sources of capital and banking services; Oaktree’s important role is to fill that gap.

Oaktree currently has a $2.3 billion portfolio, invested in 135 client companies. Of the total, 68% of the portfolio is made up of first lien loans, and another 19% is second lien. The portfolio is broad and diversified, with a slight lean toward the tech sector – the two largest segments of the portfolio are in Application Software (14.3%) and Data Processing (7.1%).

In November, Oaktree reported its fiscal 4Q21 results, as well as full year results for fiscal 2021. For the quarter, the company showed $63.8 million in total investment income, down slightly from the previous quarter. The full year’s total investment income came to $209.4 million, up 46% year-over-year. Earnings were positive, at 16 cents per share for the quarter – although this was down 15% sequentially. Full-year earnings were up yoy, gaining 25% to reach 64 cents.

On the dividend, Oaktree declared a payment of 15.5 cents per common share. This was a 7% increase from the previous quarter, and better yet, was the sixth quarter in a row that the dividend was raised. At 62 cents per common share annualized, the payment yields a robust 8.2%.

Covering this stock for Wells Fargo, analyst Finian O’Shea wrote: “OCSL’s business has considerable momentum entering FY2022, in our view, as the BDC ended FY21 with net leverage of 0.94x, the highest since Oaktree took over the adviser contract, and ~24ppts above its average under Oaktree’s stewardship…. OCSL’s earnings profile was highly-sensitive to deployments, as incremental assets would be funded with its low-cost revolver, thus creating operating leverage from lower average funding costs.”

O’Shea gives Oaktree an Overweight (i.e. Buy) rating along with an $8 price target indicating room for a modest 6.5% upside. Based on the current dividend yield and the expected price appreciation, the stock has ~15% potential total return profile. (To watch O’Shea’s track record, click here)

Judging by the consensus breakdown, opinions are anything but mixed. With 3 Buys and no Holds or Sells assigned in the last three months, the word on the Street is that OCSL is a Strong Buy. (See OCSL 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.

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