Stock Analysis & Ideas

2 “Strong Buy” Dividend Stocks Yielding at Least 7%

We’re in the midst of a market change, a shift from a trading environment that favors growth stocks to one that will favor value stocks. Investors should beware, as the shift will naturally entail high levels of volatility – witness the current correction situation we’re seeing in the NASDAQ, and the 8% fall in the S&P 500.

Mike Wilson, chief of US equity strategy at Morgan Stanley, believes the key point in the near future will be the actions by the US Federal Reserve. The central bank is now committed to ending quantitative easing, its asset purchase program which has underpinned its policy of market support for well over a decade now.

Wilson points out that the Fed’s change in policy has been in the air for months now, and that the markets have been slowly adjusting to the prospect. “40% of the Nasdaq having corrected by 50% or more…. the breadth of the market remains poor as it goes through the classic rolling correction under the surface as the index grinds higher,” Wilson noted.

Getting down to the immediate effect on investor decisions, Wilson adds, “Stocks are [still] a decent hedge against inflation, unlike bonds. However, certain stocks fit that billing better than others. In its simplest form, it means value over growth stocks or short duration over long – think dividend growth stocks.”

Heeding Wilson’s advice, we used TipRanks’ database to zero-in on two dividend stocks with high yields — 7% or better, along with long-term performance that has outpaced the broader markets. Each stock also holds a Strong Buy consensus rating; let’s see what makes them so attractive to Wall Street’s analysts.

TPG RE Finance Trust (TRTX)

The first stock we’re looking at, TPG RE, is a real estate investment trust (REIT), a class of companies long known as excellent dividend payers. That reputation comes for a quirk in tax regulation, which requires REITs to directly return a high portion of earnings to shareholders – and dividends are a convenient vehicle for compliance.

As of the end of 4Q21, TPG managed a diverse portfolio of real estate assets, totaling $5.4 billion in primary and secondary US markets. Commercial office space and multifamily dwellings made up the bulk of that portfolio, at 42% and 29% respectively; hotel space was the third-largest segment, at 12% of the portfolio. Geographically, the company’s investments are mainly in the Eastern and Western US, at 40% and 23% respectively, with Southeast, Midwest, and Southwest taking roughly equal shares of the remainder.

The company will release its 4Q21 financial results next month, but has already made public some of the numbers. Loan originations for the full calendar year 2021 totaled $1.9 billion, with 10 loans totaling $651 million coming in the fourth quarter. Loans on multifamily properties made up 68% of the new originations.

In December, TPG announced its Q4 dividend, declaring a 24 cent per common share payment. This annualizes to 96 cents per common share, and gives a yield of 7.7%, which compares favorably to the average dividend yield found on the broader markets. In addition, the company also declared a special common stock dividend payment for Q4 of 7 cents per share.

BTIG analyst Tim Hayes sees this company moving to position itself for the changing Fed policy toward higher interest rates. He writes, “The wtd. avg. LIBOR floor on the loan portfolio dropped by ~25 bps Q/Q to 1.10%, and was down from 1.66% as of 12/31/20. As older vintage loans repay and capital is reinvested into new loans with lower LIBOR floors, we expect the portfolio will become more asset sensitive and be in a position to benefit from higher rates.”

Overall, the analyst is upbeat about the stock’s prospects, and adds: “We continue to view shares of TRTX as attractively valued, trading at a near-20% discount to book value and a 7.7% current dividend yield despite taking measures to increase ROE and raise the dividend, while improving the capital structure and maintaining strong credit performance.”

To this end, Hayes rates TRTX a Buy, and sets a $15 price target to imply a one-year upside of 22.5%. Based on the current dividend yield and the expected price appreciation, the stock has ~30% potential total return profile. (To watch Hayes’ track record, click here)

Overall, it’s clear that this is a stock that Wall Street likes; the 3 recent reviews are unanimously positive, for a Strong Buy consensus view. TRTX shares are priced at $12.25, and the $15.17 average target suggests room for ~24% upside in the next 12 months. (See TRTX stock forecast on TipRanks)

Arbor Realty Trust (ABR)

For the second dividend stock, we’ll look at Arbor Realty Trust, a mortgage lender in the commercial and multifamily market. The company is a direct lender, funding loans for Fannie Mae and Freddie Mac, and making financing available for multifamily residential developers. In the third quarter of last year, the last quarter reported, the company originated over $2.47 billion in new loans.

Those origination made up a just a part of the company’s total portfolio. Arbor’s loan portfolio totaled over $9 billion at the end of 3Q21, up 24% year-over-year. Net income for the quarter was down yoy, from $82 million to $72.8 million, but distributable earnings, at 47 cents per common share, more than covered the company’s generous dividend.

Arbor pays out 36 cents per common share in dividend, per the third quarter declaration. The company has been regularly raising the dividend payment for the past several years; at the current rate, it annualizes to $1.44 and yields 8.5%.

5-star analyst Stephen DeLaney, from JMP, is upbeat on Arbor’s outlook, writing: “The outlook for ABR remains attractive with it executing well across all business lines and lending pipelines remain near all-time highs. We believe shares of ABR continue to offer an attractive total return investment opportunity due to the clear need/demand for more affordable multifamily and single-family rental housing in this country and the steps ABR has taken to improve both sides of its balance sheet.”

In line with these positive comments, DeLaney rates the stock an Outperform (i.e. Buy), and his price target, at $23, implies a one-year upside of 35% in the coming year. (To watch DeLaney’s track record, click here)

While there are only 3 recent reviews of this stock on file, they all agree that it is a Buy proposition, giving ABR its Strong Buy consensus rating. The stock is selling for $17.02 and has an average price target of $22.33, for a 31% one-year upside potential. (See ABR stock forecast 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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