Wells Fargo Says Buy These 2 High-Yield Dividend Stocks — Including One With 17% Yield

With EPS beats surpassing misses by a rather normal 4:1 ratio, 1Q23 earnings have been characterized as ‘better-than-feared.’ That said, since the Q1 earnings season began, the S&P 500’s returns have not been particularly impressive.

This suggests to Wells Fargo equity analyst Christopher Harvey that rather than being boosted by earnings/fundamentals, the gains accrued so far this year have been driven mostly by ‘funding and liquidity.’ If that is indeed the case, the outlook is not promising.

“If credit markets/liquidity (not fundamentals) drove the YTD stock rally, recent trends are not as bullish: (1) the cost of capital is rising, with Treasury yields lifting and spreads widening; (2) liquidity has been reduced, with the Fed’s balance sheet contracting $230-billion in recent weeks; and (3) the Fed’s pivot may be delayed as the labor market refuses to crack and inflation may be stickier than expected,” Harvey explained.

Harvey’s assessment leads him to believe that the market could be on the brink of a downturn. In such a scenario, it becomes crucial to adopt a defensive position. One effective way to navigate through uncertain times is by embracing the tried-and-true strategy of investing in high-yielding dividend stocks. By doing so, investors can secure a consistent and reliable income stream, regardless of whether the overall stock market experiences gains or losses.

Against this backdrop, Wells Fargo analysts have identified two potential opportunities, one of which boasts a sky-high 17% yield. Let’s take a closer look.

Blackstone Secured Lending Fund (BXSL)

The first stock we’ll look at is Blackstone Secured Lending, a business development company (BDC) operating under the umbrella of the major asset management firm, Blackstone. This BDC functions as a financial services company, offering credit and capital to a diverse range of US-based private companies across various sectors, including software, healthcare, insurance, aerospace, air freight, and more. As of March 31 this year, the company’s portfolio investments were valued at $9.6 billion in fair value. Nearly 98% of these investments are first lien senior secured, with over 99% of the debt investments carrying a floating rate.

Currently, BXSL’s portfolio consists of loans provided to 49 companies, with loan amounts ranging from approximately $67 million to over $348 million. Launched in 2018, the firm transitioned into a public entity in the fall of 2021. To attract investors, the company boasts an impressive annual net return of 10.3% since its inception. Blackstone Secured Lending’s position as a defensive stock is further strengthened by its primary backer, the Blackstone asset manager, which manages over $991 billion in total assets under management (AUM).

A look at Blackstone’s financial results from 1Q23, the last quarter reported, shows that the company realized $265 million in total investment income for the first quarter, up 42% year-over-year and coming in $5.18 million above the forecast. At the bottom line, the net investment income of $149 million gave an EPS of 93 cents per share, in-line with expectations and up 52% in the past year.

Blackstone Secured Lending has paid out dividends since going public, and the last declaration, made on May 10, was for a 70-cent quarterly common share dividend payment. This payment, for Q2, maintains the 17% quarter-over-quarter increase implanted in the prior quarter, and the annualized rate of $2.80 gives a yield of 11%.

In his coverage of this dividend champ, Wells Fargo analyst Finian O’Shea sees this company’s high-quality investments as a key point to attract investors. He writes, “Where most ‘seasoned’ BDC portfolios often have double-digit top-line contributions from lower-quality income sources (PIK, fee, and dividends), BXSL continues to shine on quality of revenue. We view this measure as an indicator of underlying credit quality. More importantly, it provides BXSL flexibility to work through potential problem credits (amendments, restructurings). This flexibility is only strengthened by BXSL’s liabilities, which are primarily unsecured, and have no restrictions on the underlying collateral in contrast to revolvers and other asset-based facilities.”

Looking ahead, O’Shea gives BXSL shares an Overweight (i.e. Buy) rating, backed by a $26 price target. (To watch O’Shea’s track record, click here)

Turning now to the rest of the Street, where this stock gets a Moderate Buy rating from the analyst consensus, based on 9 recent reviews that include 6 Buys and 3 Holds. The shares have an average price target of $27.11, suggesting a 12-month gain of 7.5% from the current share price of $25.24. Based on the current dividend yield and the expected price appreciation, the stock has 18.5% potential total return profile. (See BXSL stock forecast)

Angel Oak Mortgage (AOMR)

Shifting gears slightly, we’ll turn our sights on Angel Oak Mortgage. While still a financial company, Angel Oak is a real estate investment trust specializing in financing residential real estate properties. The company bills itself as offering solutions for ‘underserved’ borrowers in the mortgage market, and specializes in offering non-QM loans. In short, Angel Oak is working at the downscale end of the mortgage business, with borrowers who would otherwise not qualify for the loans needed to buy a property.

While Angel Oak’s primary benefit to lenders is its commitment to the non-QM market, the company also offers a streamlined, paperless application process, using a tech platform to automate the entire loan application, from receiving the borrower’s information to determining eligibility. The company boasts that the whole process can take minutes, instead of days.

The risks are higher when working with Angel Oak’s clientele, and that was reflected in the recent 1Q23 earnings results. Angel Oak reported a net interest income of $6.8 million, down from $16.9 million in the prior-year quarter and missing the forecast by $3.3 million. At the bottom line, the company had a negative non-GAAP distributable EPS; that is, a loss of 37 cents per share. That figure was 55 cents below the expected 18-cent EPS profit. Headwinds in the quarter included a tighter credit market and rising mortgage rates, making it more difficult for property buyers of all stripes – and squeezing the lower end most of all.

On a positive note, Angel Oak finished the first quarter of 2023 with a solid cash position. The company’s cash and liquid assets were up 25% from the previous quarter to a total of $36.7 million. And we should note that the stock is up by an impressive 72% so far this year.

Despite the hefty loss in distributable EPS, Angel Oak continued paying out its quarterly dividend, and declared the last payment, for a May 22 payout, on the fourth of this month. The 32-cent common share dividend annualizes to $1.28 and gives a sky-high yield of 17%.

This resi-REIT has caught the eye of analyst Donald Fandetti, who, in his note on the stock for Wells Fargo, states: “With its focus on acquiring and investing in non-QM mortgage loans, we view AOMR as a unique mortgage REIT. We view non-QM as an attractive long-term market opportunity. Note that AOMR benefits from its affiliation with the broader Angel Oak platform, including proprietary deal flow from Angel Oak Mortgage Lending (the largest non-QM lender in the U.S.) and expertise from its external manager Angel Oak Capital Advisors… Progress on liquidity this qtr and additional securitizations could further help reduce financing risk…”

Fandetti goes on to give AOMR shares an Overweight (i.e. Buy) rating, and he sets his price target at $9, implying the stock will gain 19.5% in the year ahead. (To watch Fandetti’s track record, click here)

While Fandetti and Wells Fargo are willing to buy here, the Street generally is more cautious. The stock has 3 recent reviews, split evenly with 1 Buy, 1 Hold, and 1 Sell, for a Hold consensus rating. (See AOMR stock forecast)

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.