Dividend stocks are a defensive play, so why consider them now? Markets are high, and are heading higher; this trend is real and has been sustained now for an extended period of time. But at least one market expert, Tobias Levkovich, chief US equity strategist for Citigroup, sees tougher times coming in the short term.
Levkovich notes that a combination of factors, including the possibility of corporate tax hikes, increased pressure on profit margins, rising inflation, and the Fed’s ongoing discussions on ending their easy money stance, all point toward a pullback. He sees the S&P 500 ending the year at 4,000, ~12% down from current levels.
Regarding those current levels, Levkovich says, “Hitting new highs, leading to new highs means markets never correct, which doesn’t quite make sense.”
And this will bring us to dividend stocks. If the Citi view is right, and markets are due for a pullback in the short term, then a defensive move to protect the portfolio and the income stream would be in order. Dividend stocks are the classic play for such a scenario, combining a tendency toward lower share price volatility with a steady income stream from the dividend itself.
We’ve used the TipRanks data to look up three dividend stocks that check plenty of boxes in terms of solid potential. They have earned a Strong Buy rating from the analyst consensus, boast double-digit upside for the coming year – but even better, they also come with dividend payout ratios below 30%. Typically, a low payout ratio is an indicator that the dividend is ‘safe,’ as the company has plenty of slack even if earnings fall.
Redwood Trust (RWT)
First up, Redwood Trust, is a real estate investment trust. These companies, which acquire real properties to manage and lease, also invest in mortgages and mortgage backed securities. They are typically perennial dividend champs, as tax codes require them to return as much as 90% of earnings directly to shareholders; dividends are usually a big part of that return. Redwood is a typical REIT with a focus on the residential sector, investing in prime jumbo residential loans and residential mortgage-backed securities, along with multifamily securities from Fannie Mae and Freddie Mac.
The company reported 66 cents EPS in the 2Q21, beating the consensus estimate of $1.59 by ~88%. The sound financial results underpinned Redwood’s dividend, with the company declared at 18 cents for the second quarter. At this rate, the payment annualizes to $72 cents per common share, and gives a yield of ~5%. This compares favorably to the ~2% yield found in the broader markets. And better yet – the payout ratio is low, at 20%, indicating that there is plenty of slack available for further dividend increases.
Among the fans is Raymond James’ Stephen Laws, who sees enough to be buoyed about the quarter’s performance.
“Redwood Trust reported strong 2Q results, with earnings easily beating our estimates and book value increasing 6.5%. We are increasing our estimates to reflect the strong 2Q results and continued strength in the mortgage banking business. We expect volumes to remain strong given demand for jumbo and BPL loans, as well as increasing contributions from new initiatives such as Rapid Funding and Churchill,” the 5-star analyst opined.
The analyst summed up, “We believe shares should trade at a premium to book value given the strength in the operating business, our expectation of continued book value growth, and the internal management structure.”
To this end, Laws rates the stock a Strong Buy, and his $16 price target implies a one-year upside of ~27%. (To watch Laws’ track record, click here)
Redwood shares have been gaining steadily over the past year, nearly doubling in the last 12 months. The shares are currently priced at $12.47 and have crept up on the $14.20 average price target, leaving room for 13% upside in year ahead. Based on 5 Buys, the stock boasts a Strong Buy consensus rating. (See RWT stock analysis on TipRanks)
B2Gold Corporation (BTG)
From real estate, let’s switch to gold – because every investor wants a stock as good as gold. The metal is the traditional base of all money, and precious metals generally are the ‘gold standard’ in storing value. And who doesn’t want to own a gold mine?
B2Gold is just that, a company involved in mining. The Canada-based firm is an international gold producer, with active mines in Mali, Namibia, and the Philippines, along with development projects in Burkina Faso and Colombia, and additional exploration projects in all five of those countries. The company’s active mines 211,612 troy ounces of gold in 2Q21, exceeding its budgeted production by 5%, or more than 9,700 ounces. Looking forward, the company is on track to produce between 970,000 and 1,030,000 ounces of gold this year.
This strong production has brought in solid revenue. B2Gold reported $363 million in gold sales for Q2, and $725 million for 1H21. Net income, however, has lagged revenues. EPS in Q2 came in at 7 cents per share; this was down from 13 cents in the year-ago quarter.
The company reported a sound liquidity position, with $382 million in cash and cash equivalents at the end of Q2, and an undrawn, fully available revolving credit facility totaling $600 million. B2Gold is predicting it will generate up to $630 million cash from operations for the full year, with up to $500 million of that coming in the second half.
B2G’s dividend has remained stable for the past 4 quarter, at 4 cents per common share. While this doesn’t sound high, it gives a 4.2% yield – about double the average yield found in the broader market – and the payout ratio is just 29%.
Canaccord’s 5-star analyst Carey MacRury notes that B2G’s recent earnings were weaker than expected, but also points out that cash generation is expected to triple in the near-term.
“H1 operating cash flow totaled $138 million, in line with guidance, and the company expects operating cash flow of $500 million in H2 at $1,800/oz, more than triple H1’s level,” the analyst noted. “Notwithstanding increased geopolitical concerns in Mali, the company continues to execute well, is debt-free and well positioned to fund its growth projects and dividend from operating cash flow while still building a sizeable cash balance at current gold prices.”
The analyst’s comments back up a Buy rating on the stock, and his C$9.50 (US$7.53) suggests ~97% upside in the coming 12 months. (To watch MacRury’s track record, click here)
Wall Street’s not unanimous on this Strong Buy stock, but that consensus is based on a 4 to 1 split favoring Buys over Holds. The shares in this gold miner are priced at US$3.85 and have an average price target of US$7.33, implying a one-year upside of ~91%. (See BTG 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.
