Stock Analysis & Ideas

2 ‘Strong Buy’ Dividend Stocks Yielding at Least 7%

We are in an upward-bound market right now, the S&P is up over 18% so far this year, and it’s tempting to just sit back and the portfolio appreciate. Returns are solid, and if they’re not as high as they were in 2019, they are more broad-based then they were when tech pulled back earlier this year. There’s a positive feeling in the air.

It’s easy to be complacent in an atmosphere like this, but some Wall Street pros believe that now is the time to diversify the portfolio, and shift into multiple income strategies, instead of just banking on the share price gains. In other words, take a long look at dividend stocks.

Yes, dividend stocks are classic defensive plays, useful for protecting yourself when markets decline, but they work in a bull market, too. While they typically show less volatility than the markets generally – rising less in the bulls, and falling less in the bears – they make up for that with the dividend. A reliable dividend stock will pay out no matter what the market conditions, providing a regular income stream.

Bearing this in mind, we used the TipRanks’ database to zero-in on two stocks that are showing high dividend yields – at least 7%. Each stock also holds a Strong Buy consensus rating; let’s see what makes them so attractive to Wall Street’s analysts.

Ready Capital Corporation (RC)

Unsurprisingly, we’ll start with a real estate investment trust. These companies, which buy, own, lease, and manage real properties in the residential, commercial, and industrial sectors. Ready Capital, based in New York City, deals mainly in commercial properties, as well as real estate loans and mortgage backed securities in the commercial sector. The company also originates new loans, providing financing and servicing for mortgages on commercial and multi-family properties.

The company reported, on June 28, that its 2Q21 business with Freddie Mac, in the small balance loan (SBL) and small multifamily bridge-to-agency businesses increased more than 36% from the first quarter. RC closed on 72 of these Freddie Mac loans, worth a total of $223 million, and had a firm Q3 pipeline of an additional $130 million.

Also in June, the company declared its Q2 dividend payment. At 42 cents per common share, the declared dividend is the highest since March of 2020 and marks a reversal of the pared back payments implemented during the corona pandemic. The dividend annualizes to $1.68 and yields over 10%.

Covering this stock for BTIG, analyst Tim Hayes takes a bullish view – and the dividend is one reason why.

“…strong 1Q21 momentum has carried into 2Q21, which should drive very strong results and dividend coverage… Management is confident that it can achieve a 10%-plus ROE even after PPP earnings have run its course, as it continues to take market share in high-ROE, government-sponsored businesses and the broader small balance commercial (SBC) market. As RC continues to scale and increase origination volumes, we expect there could be additional upside to the dividend, which has increased over the past four consecutive quarters and offers the most attractive yield in the sector,” Hayes explained.

To this end, Hayes rates RC a Buy along with a $18.50 price target that implies 23% upside from current levels. (To watch Hayes’ track record, click here)

A look at the Wall Street consensus on Ready Capital shows that Hayes is not alone in his optimism. This stock has received 6 recent reviews, and they break down to 5 Buys and just a single Hold to support the Strong Buy consensus rating. The shares are priced at $15.01 and have an average price target of $16.75, which implies ~11% upside for the next 12 months. (See RC stock analysis on TipRanks)

Enterprise Products Partners (EPD)

From real estate, we’ll shift over to energy, another sector well-known for paying strong dividends. Enterprise Products is a midstream company, working in the transport segment of the energy sector; specifically, Enterprise moves the product from the well head to the refining, storage, or transport points.

Enterprise gathers, treats, processes, transports, and stores natural gas; transports, fractionates, and stores natural gas liquids, and operates NGL import/export terminals; and operates marine transportation assets on the US intracoastal waterway system. The company’s operations are centered in Texas and Louisiana, but pipelines, storage, and refining facilities extend into Appalachia, the Midwest, the Rocky Mountains, and the Southeast. Enterprise boasts over 50,000 miles of pipeline in total, along with storage space for 160 million barrels of oil and 14 billion cubic feet of natural gas.

Increased demand for fuel as the COVID restrictions were lifted powered EPD’s revenues well past their pre-pandemic levels in the first quarter of this year. Enterprise reported over $9.1 billion in Q1 revenues, up 22% from the year-ago quarter. EPS was 61 cents, higher than the last three quarter, although flat on a yoy basis – and 20% higher than the analyst estimates.

Enterprise’s cash flow, like the revenues and earnings, were sound. In Q1, the company reported cash flow from operations (CFFO) of $2 billion, matching the yoy number. In the 12 months ending on March 31, the company paid out 68% of its cumulative CFFO in distributions to shareholders, and reported a free cash flow of $3.1 billion for that period.

The company’s dividend has been steady for the last two years. The company has a 12-year history of reliable dividend payments, and gradual growth. Earlier this months, Enterprise declared its Q2 payment of 45 cents per common share; at an annualized rate of $1.80, this gives a yield of 7.3%, more than triple the average yield found among S&P-listed stocks.

Top analyst TJ Schultz, rated in the top 2% of Wall Street’s stock pros, is impressed by this midstream company, and it shows in his commentary: “When there are issues, EPD has opportunities. This was demonstrated in 1Q… EPD beat consensus by 14% due to marketing opportunities induced by Winter Storm Uri. We continue to view EPD as a core MLP holding that can grow distributions through commodity volatility due to its large and diversified asset base.”

Getting into details, Schultz adds, “…the partnership’s multi-year organic growth backlog helps provide visibility on long-term distribution growth. EPD has grown and should continue to grow its fee-based cash flows as announced projects enter service and ramp. The large market capitalization relative to the rest of the midstream MLP space should mean easier access to and lower cost of capital and better trading liquidity. We believe the diverse asset base adds stability to the cash flows and is defensive in a softer equity market or energy tape specifically.”

In line with this bullish view, Schultz gives EPD a $29 price target, implying a potential upside of ~20% for the next few months. (To watch Schultz’s track record, click here)

Once again, we’re looking at a stock with a Strong Buy analyst consensus – and this time, that consensus, based on 6 reviews, is unanimous. EPD shares have an average price target of $28.83, very similar to Schultz’s and also suggesting ~20% one-year upside. (See EPD stock analysis on TipRanks)

To find good ideas for 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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