Down at the bottom, investors get into the market for the same reason: to make money. And that drive will push them to find an equity strategy that ensures solid returns, no matter what the markets do. The conventional wisdom will suggest two such strategies: buying stocks when they’re priced low, and getting into dividend stocks.
The first is self-explanatory. Low-priced stocks, up to $10 have more room for share appreciation, and Wall Street’s analysts are always on the lookout for solid buys with a low cost of entry. As for the second, dividends have long been used as a defensive strategy, to guarantee an income stream from the portfolio in any market conditions.
It’s possible, of course, to follow a hybrid investing strategy. Finding stocks with both low share price and high yield dividends should bring the rewards of both paths – and professional analysts have picked out stocks that offer these dual advantages.
Using TipRanks database, we pinpointed two of those picks. These are Buy-rated stocks, with a combination of considerable upside and high dividend yield. We’re talking about at least 11% yield here. Let’s take a closer look.
Falcon Minerals Corporation (FLMN)
We’ll start in the energy industry. Falcon Minerals is a small-cap oil and gas company, with ownership of energy and mineral rights on more than a quarter-million acres in the Texas Permian Basin. The company’s main assets are located in that Basin’s Eagle Ford shale formation; Falcon has more than 3,000 potential drilling sites in that region. The company also has assets in gas-producing Marcellus Shale in the Appalachians. Falcon’s assets in that area include royalty rights on approximately 300 active gas wells.
Falcon describes its mission as providing the strongest return to investors, based on oil and gas production on the company’s land holdings. To that end, the recent 2Q21 financial report should be of interest to investors. The company showed strong gain in both total revenues and EPS, completing an apparent turnaround from the depressed results of the past four quarters. At the top line, oil and gas revenues of $18.93 million were the best in more than two years; the EPS figure of 7 cents profit was the best since 3Q19. Falcon’s gains were driven by a 22% quarter-over-quarter increase in net production from 1Q21. Also on a positive note, Falcon saw its pro-forma free cash flow rise 48% from Q1, to reach a total of $13.3 million.
Building on the solid quarter, Falcon’s management has recently declared a 15-cent per common share dividend payment. The company has a history of adjusting the dividend to keep it line with distributable cash and earnings, and cut the payments back during the corona crisis. The increase to the current 15-cent payment marks a full return to pre-pandemic dividend levels, as the dividend has not been this high since the August quarter of 2019. The current dividend annualizes to 60 cents per common share, and gives a robust yield of 12.55%.
Analyst Eduardo Seda , from Jones Trading, notes both the strong cash flow and the company’s variable dividend policy. For the bottom line on Falcon, Seda writes: “During 2Q21, we note that FLMN’s operating performance showed continued improvement. In our opinion, this was primarily a result of strengthening commodity prices, higher production (due to the rising demand for energy as global economies continue to reopen from Covid-19 pandemic lockdowns), and cost control.”
To this end, Seda rates this stock a Buy, and his $11 price target implies an upside of 134% for the year ahead. Seda explains that his target is based on: “1) a lower cost of capital structure as FLMN continues to reduce its debt in 2021 and beyond; and 2) our increasing of the distribution growth rate a tad higher beginning in 2021 and beyond. This is the result of FLMN’s payout ratio being higher than our estimate of 80.0%.” (To watch Seda’s track record, click here.)
Overall, Falcon has 5 recent analyst reviews, split 4 to 1 between Buy and Hold, giving the stock a Strong Buy analyst consensus rating. The stock’s $7.3 average price target implies ~55% upside potential from the current $4.7 trading price less than $10. (See FLMN stock analysis on TipRanks)
Oxford Lane Capital (OXLC)
From energy we’ll turn to the world of finance. Oxford Lane Capital is closed-end management investment company that specializes in debt and equity tranches of collateralized loan obligation (CLO) vehicles. The company’s portfolio is composed primarily of senior secured loans and a combination of high yielding bonds and mezzanine debt. Oxford Lane avoids exposure to real estate loans, mortgage loans, and consumer-based debt pools.
Oxford Lane’s net asset value (NAV) per share has been growing steadily this year. Between the end of calendar Q1 and calendar Q2, the company saw its NAV grow from $5.94 to $6.56, an increase of more than 10%. During the same period, the company reported a total investment income (TII) of $41.7 million, up $5.6 million from the previous quarter. $40 million of this income came from CLO equity investments. Per share, Oxford Lane reported a net investment income of 41 cents, nearly double the year-ago quarter’s result.
This company pays out its common share dividend as a monthly distribution, and at the end of July declared the payment for October-November-December at 6.75 cents. This annualizes to 81 cents per common share, and gives an impressive yield of 11.3%.
B. Riley analyst Matt Howlett likes what he sees in Oxford Lane’s, noting: “OXLC boasts a leading cost of capital and currently benefits from the highest-yielding investment portfolio, which is heavily concentrated in CLO equity. OXLC is generating the highest top-line yields in the space on GAAP and cash flow bases, which, when combined with its scale, consistently drives superior ROE performance.”
The analyst continued, “We believe that investors in OXLC can benefit from the company’s structure and ability to access propriety returns in the CLO equity market that are typically not available to public investors. OXLC’s permanent capital structure and ability to access low-cost debt at the holding company create a powerful cash flow stream that can be paid out to shareholders. The stock has the highest cash yield relative to peers, and NII is poised to grow…”
In line with these comments, Howlett puts a Buy rating on the stock. His price target, at $8, indicates potential for ~11% upside from current levels. Based on the current dividend yield and the expected price appreciation, the stock has ~22% potential total return profile. (To watch Howlett’s track record, click here)
All in all, this stock gets a Moderate Buy rating from the Wall Street analysts based on two positive reviews. The stock is selling for $7.21 and has an average target of $8, matching Howlett’s. (See OXLC 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.
