The markets are getting buffeted by a combination of headwinds and tailwinds that make for confused navigation. Corporate second quarter earnings have given a boost, as 85% of the S&P-listed firms that have reported so far have also beaten the forecasts. In another piece of positive news, the July jobs report came in well ahead of expectations, with the best performance in a year.
On the negative side, the Delta variant of the corona virus has renewed fears of pandemic lockdowns, while employers are also dealing with a serious labor shortage. Even though new jobs surged in July, and unemployment fell, employers reported having 9.8 million unfilled positions during the month.
Covering the markets from Citi, chief US equity strategist Tobias Levkovich adds one final headwind – that September is typically the market’s toughest calendar month – and comes to the conclusion that the negatives will outweigh the positives as we head into autumn.
“The paucity of immediate catalysts for a pullback is cited regularly, although we worry about higher taxes, cost pressures eating into profitability, tapering and more persistent inflation all coalescing in September,” Levkovich added.
For retail investors, this environment points toward defensive stocks, to insulate the portfolio from share depreciation, and that will naturally bring up the subject of dividend stocks. The dividend payment provides a steady income stream, one that can compensate for lower share gains when markets hit a plateau.
Bearing this in mind, we used the TipRanks’ database to zero-in on two stocks that are showing high dividend yields – at least 8%. Each stock also holds a Strong Buy consensus rating; let’s see what makes them so attractive to Wall Street’s analysts.
MPLX LP (MPLX)
First up, MPLX, is the midstream spin-off of Marathon Petroleum. Emerging as a stand-alone company in 2012, MPLX took up the parent company’s pipelines, terminals, refineries, and river shipping assets and services – the midstream ops that moved oil and gas products from the wellheads to the refining, storage, and distribution facilities. MPLX’s network of assets stretches across the US, from the Rocky Mountains to the Gulf Coast to the Midwest.
It’s a profitable network of assets, and MPLX in Q2 of this year showed the highest top line revenue since 1Q20, of $2.27 billion. The company’s net income came in at $706 million, up 9% from $648 million in the year-ago quarter.
Of interest to investors, especially dividend-conscious investors, MPLX generated over $1.36 billion in net cash during the quarter, including $1.25 billion in distributable cash flow. The company was able to return $900 million to shareholders, through a combination of dividend payments and share repurchases.
At the end of last month, MPLX announced its regular quarterly dividend payment, of 68.75 cents per common share. The dividend has been held steady at this level for the last 7 quarters. At $2.75 annualized, it gives a yield of 10%, well above the average found on the broader markets (approximately 2%).
Covering MPLX for Raymond James, analyst Justin Jenkins sees the company in a stable position.
“The pandemic drove clear headwinds for the Marathon franchise in 2020 (refinery runs, G&P volumes/prices). Despite this, MPLX cost-cutting and contract protection steadied results, with 2Q21 illustrating again that MPLX can grow cash flow in the current environment. We remain positive on MPLX’s unique diversification (demand-pull L&S, supply-push G&P), and argue this optimism is not fully reflected in the valuation. In turn, buybacks provide a catalyst in 2021 as even more financial flexibility materializes,” Jenkins opined.
To this end, Jenkins rates MPLX shares an Outperform (i.e. Buy), along with a $33 price target, implying ~21% upside potential in the year ahead. Based on the current dividend yield and the expected price appreciation, the stock has ~31% potential total return profile. (To watch Jenkins’ track record, click here)
The Strong Buy consensus rating on this stock is supported by 9 reviews, which include 7 Buys against 2 Holds. The average price target stands $32.75, which implies ~20% upside potential from current levels. (See MPLX stock analysis on TipRanks)
AGNC Investment (AGNC)
From fossil fuel midstream we’ll shift gears to a real estate investment trust (REIT). AGNC, a Maryland-based REIT, is involved in the purchase, ownership, leasing, and management of real properties. The company focuses its activity on mortgage-backed securities, especially the relatively safe class of loans with backing from US government programs.
As of the end of Q2, AGNC’s portfolio totaled over $87 billion. This included $58.1 billion, or 66% of the total, in residential mortgage-backed securities. The large majority of these are 30-year fixed instruments.
The company’s second-quarter results showed net negatives in both revenue and earnings – the first such negative quarter since 1Q20, at the peak of the corona pandemic crisis. AGNC’s management remains sanguine about the current environment, seeing the improving jobs situation as a sign that inflation may be temporary – but also seeing the Federal Reserve as likely to raise rates, at least modestly, in the coming year. Such a move would goose the company’s returns.
On the dividend front, the company pays out monthly rather than quarterly, at a rate of 12 cents per common share per month, or 36 cents quarterly and $1.44 annualized. This gives the dividend a yield of 9%.
Maxim’s 5-star analyst Michael Diana makes this point in his recent note on the stock, and adds: “We maintain our 2021 quarterly dividend estimate of $0.36, which is the current level of the dividend. We expect the dividend to be over-covered by earnings, and possibly go up at some point during 2022. With core (net spread and dollar roll) income averaging $0.76 in the past three quarters, we feel confident in our quarterly EPS estimate of $0.60.”
In line with these comments, Diana rates AGNC shares a Buy, and sets an $18 price target, showing his confidence in a 12% one-year upside. (To watch Diana’s track record, click here)
Diana is not the only bullish analyst here. AGNC has picked up 7 recent reviews, with a 6 to 1 breakdown of Buy versus Hold. The stock has a trading price of $16.03 and an average price target of $17.46. This gives the stock ~9% upside this year, which should result in an estimated 12-month total return of about 18%. (See AGNC 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.
