Inflation may be rising, but for now, at least, investors don’t seem to mind. Both the NASDAQ and the S&P 500 are holding just below their all-time high levels. But are the good times here to stay?
One clue to the answer came in last week’s Federal Open Market Committee meeting, where officials indicated that two interest rate increases are possible as early as 2023, and the committee came just ‘two dots,’ or two members’ votes, from pulling at least one of those increases into next year. This is a more hawkish stance from the FOMC than had been anticipated before the meeting.
It’s an indication that the Fed may be seeing inflationary pressures that may be rising faster than the markets had priced in, and that the end of the Fed’s long-time easy money policy may be in sight. This is the view of the current environment taken by Bank of Americas strategist Hans Mikkelsen.
“Expect the Fed to soon begin tapering its purchases, and to start hiking interest rates earlier than expected – and most importantly much faster than currently priced in markets,” Mikkelsen noted.
If Mikkelsen turns out to be right, then now is the time for investors to prepare. Recent indicators show inflation at an annualized rate of 4% to 5%, so it’s best to seek out a return higher than that. And that brings us to dividend stocks, where there are plenty of choices out there offering high yields.
Using TipRanks’ database, we pinpointed two stocks that are not just poised to make double-digit gains, but are also showing strong dividends, at least 7% to be exact. It’s an unbeatable combination for income-minded investors: share appreciation and high-yielding dividend returns. In fact, each stock also holds a Strong Buy rating from the analyst consensus. Let’s take a closer look.
British American Tobacco (BTI)
We’ll start with a ‘sin stock,’ British American Tobacco, one of the world’s largest cigarette and tobacco product companies British American’s brands include such well-known names as Kent, Lucky Strike, and Pall Mall, which are recognized world-wide.
Sales and distribution disruptions during the COVID crisis year hurt the company, but the revenue slip in 2020 was minor; the top line was 25.78 billion GBP, from 25.88 billion the year before. Earnings increased year-over-year, growing from 7.91 billion GBP to 8.67 billion GPB. The company’s operating profit rose by more than 10% in 2020.
Looking ahead, the company reaffirmed its 2021 outlook, forecasting a revenue growth between 3% to 5%. Furthermore, the company expects FX headwind of ~7% on full year adjusted EPS growth.
On the dividend front, British American currently pays out the equivalent of 74 cents US per common share, and has held that steady for the last four quarters. The company has paid out regular dividends since 1988. At the current payment, which annualizes to $2.98 per share, the dividend yields 7.64%, or more than triple the average dividend yield found among S&P-listed stocks.
Covering this London-based company for Argus Research, analyst Kristina Ruggeri writes: “A leading global tobacco supplier, British American has a record of consistent growth, with gains in revenue, net income, and adjusted EPS over the last several years… In 1Q21, BTI experienced growth in its New Categories segment with all three new category products experiencing volume and revenue growth as well as market share gains across all key markets…”
Ruggeri does note headwinds for the company: “British American faces a range of legal and regulatory risks, including smoking bans, restrictions on package advertising, FDA regulation of both smokeless and smokeable products, and risks related to allegations of bribery in its African operations…”
All told, however, Ruggeri is bullish at the end, rating the stock a Buy, and setting a $50 price target that implies room for 28% upside in the year ahead. Based on the current dividend yield and the expected price appreciation, the stock has ~35% potential total return profile. (To watch Ruggeri’s track record, click here)
Overall, British American Tobacco has 4 recent stock reviews on file, and they break down 3 to 1 in favor of Buy over Hold, for a Strong Buy consensus rating. (See BTI stock analysis on TipRanks)
Barings BDC, Inc. (BBDC)
From tobacco, let’s move over to business development. Business development corporations, or BDCs, exist to bring capital to new businesses, usually in the small- to mid-market range, where entrepreneurs may have difficulty accessing financial services. Barings is just such a financial service provider, offering both access to working capital and asset management to its clients. Barings invests in debt, equity, and fixed income assets, and bills itself as a $326 billion global investment manager.
In the recently 1Q21 earnings report, Barings beat the consensus figures by a margin 14%. EPS came in at 34 cents per share; which was down from Q4 by 26%, but was a far cry from the year-ago quarter’s loss of $2.30 per share.
BDCs tend to channel a large part of its profits back to their own investors, and dividends make a convenient medium for that action. Barings has been raising its dividend payment per common share regular for the last 3 years, and the current declaration, which was paid out earlier this month, saw the dividend increase again, by 5%, to reach 20 cents per common share. At 80 cents annualized, this dividend yields 7.6%.
Among the fans is Robert Dodd, a 5-star analyst with Raymond James, who gives BBDC shares a Strong Buy rating, along with a $12 price target. This figure suggests ~14% upside potential for the year ahead. (To watch Dodd’s track record click here.)
“1Q21 earnings matched our estimates and beat consensus, and NAV / Share growth in the quarter was healthy. With stable projected earnings and a forecasted increasing dividend, we believe multiple expansion is warranted from current levels…” Dodd wrote.
While this stock has only 3 recent analyst reviews on record, all 3 are to Buy, making BBDC’s Strong Buy consensus unanimous. The shares are priced at $10.56 and their $12.08 average price target indicates an upside potential of 14.5% in the next 12 months. (See BBDC stock analysis on TipRanks)
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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.