With gasoline prices through the roof at record highs, inflation running at 40-year record levels, and last year’s bullish stock market turn down into a genuine bear, it’s no wonder that the financial and economic worlds are looking like reruns of ‘That 70s Show .’ Market watchers remember that the bad times of the late 70s and early 80s were tamed only when Fed Chair Paul Volker sparked a recession with near-20% interest rates – and for investors under 45, just take note that Q1 this year saw a 1.5% GDP contraction. Should Q2 show the same, it would mean that a recession is already on us.
The debate so far centers on just how deep the next recession will likely be and exactly when it will begin. For now, the consensus would seem to be that a mild recession in headed our way, along with higher interest rates, likely by year’s end.
Writing for Morgan Stanley, however, chief US equity strategist Mike Wilson takes a much more bearish stance, predicting a deeper and more dangerous recession than most would allow. Noting that the current turndown has left the S&P ‘more fairly priced,’ Wilson goes on to say, “It does not price the risk of a recession, in our view, which is 15-20% lower, or roughly 3000. The Bear market will not be over until recession arrives or the risk of one is extinguished.”
A market environment like this practically screams out for investors to take defensive action – and that will naturally get them looking at dividend stocks. Reliable, high-yield div payers will provide a steady income stream, guaranteeing a return even when stock markets turn down, and even if the bear market is deeper than expected.
With this in mind, we’ve used the TipRanks database to pinpoint two stocks that match a solid defensive profile: a Strong Buy from the analyst’s collective wisdom and a dividend yield of 8% or more. Let’s take a closer look.
Starwood Property (STWD)
We’ll start with a real estate investment trust, or REIT, a class of company long known for their high-yield dividend payments. Starwood Property, which has offices in New York and Greenwich, San Fran and LA, and London, boasts a $24 billion portfolio in commercial and residential lending, infrastructure lending, and investing & services. Multifamily residences are the largest single property type in the portfolio, making up 32% of the total commercial real estate loans. The company is one of the largest commercial lenders in the US real estate sector.
All of that can bring home the bacon, and Starwood does just that. The company ended 1Q22 with a GAAP net income of $1.02 per diluted share. This led to distributable earnings per share listed at 76 cents for 1Q22, up 52% from 1Q21. Starwood’s total revenues in Q1 came to $225 million.
For dividend investors, this provides a sound foundation for the 48 cents per common share payment. Starwood has held that payment steady at its current level since 2014, and has not missed a dividend payment since it started the payouts in 2010. At its current level, the dividend annualizes to $1.92 per common share and it yields a robust 9.1%. It’s important to note that Starwood’s dividend exceeds the current rate of price inflation (8.6% reported for May), giving the stock a positive real return in today’s conditions.
Analyst Donald Fandetti of Wells Fargo covers this stock, and he notes that the first quarter of the year was ‘another strong quarter for the company.’ Fandetti goes on to write, “They continue to differentiate by generating gains on investments in addition to growing net interest income. As a commercial mortgage REIT focused on floating-rate loans, if the Fed boosts rates by 200bps earnings would increase by 11c annually. We also see room for STWD to increase the quarterly dividend and/or pay a special dividend later his year.”
“We expect origination activity to continue to be healthy for the foreseeable future as their are ample lending opportunities coming out of the pandemic. We believe the portfolio is well positioned even if we enter an economic slowdown,” Fandetti added.
All in all, good news for dividend investors. Fandetti’s comments back his Overweight (ie Buy) rating on Starwood Property shares, while his $29 price target implies a one-year upside potential of ~37%. (To watch Fandetti’s track record, click here†
Wells Fargo is hardly the only institution taking a bullish stand on Starwood Property; the stock has 5 recent analyst reviews, and they are unanimously positive for a Strong Buy consensus rating. The stock is selling for $21.17, and its $28.60 average price target suggests it has room for 35% upside in the next 12 months. (See STWD stock forecast on TipRanks)
Enterprise Products Partners (EPD)
From REITs, we’ll turn to energy stocks, another sector that is well-known for returning profits to stakeholders via dividends. Enterprise Products is a midstream company, one of the many energy sector operators that moves product – crude oil, natural gas, and natural gas liquids – from the wellheads to tank farms, refineries, and transfer/export terminals.
Enterprise controls a network of assets, including natural gas and crude oil pipelines, storage sites, and processing facilities, that handles this work. The company’s network stretches from the gas fields of Appalachia to the Great Lakes region to Texas and the Gulf Coast and up into the Rocky Mountains. Midstream on that scale is major business, and Enterprise boasts a market cap of ~$53 billion. Year-to-date, the company’s stock has gained 14%, a sharp outperformance compared to the 21% ytd loss on the S&P 500.
In recent months, Enterprise has made moves to both expand and streamline its business. On the expansion side, in April the company signed a ‘letter of intent’ with Oxy Low Carbon Ventures, to enter a joint project for the transportation and sequestration of carbon dioxide (CO2) on the Texas Gulf Coast.
On the streamlining side, and also in Texas, Enterprise entered an agreement with Magellan Midstream Partners by which two of the companies’ crude oil terminals – Magellan East Houston and Enterprise Crude Houston – will be able to transfer certain barrels of crude oil between the terminals at no cost. The agreement will apply to specific pipeline deliveries, and only of crude oil whose buyer has not specified a preferred terminal delivery.
Enterprise saw a massive year-over-year increase in revenue in 1Q22, a gain that was driven, in part, by increased prices for hydrocarbons. The top line came to just over $13 billion, which was up 41% year-over-year. Net income attributable to shareholders came in at $1.3 billion, or 59 cents per diluted share. The company’s distributable cash for 1Q22 came to $1.8 billion, and Enterprise bumped its common share distribution payment (their name for the dividend) from 45 cents to 46.5 cents. Enterprise has kept the dividend at that level for the Q2 declaration.
At 46.5 cents per common share, the dividend has an annualized payment of $1.86 and yield of 8%. This compares favorably to the ~2% yield among S&P-listed companies, and to the ~3% yield in the US Treasury bond market.
In coverage for investment firm Stifel, analyst Selman Akyol points out several bullish factors when he writes: “EPD’s petrochemicals business continues to outperform expectations, given its scale has increased over the years and its ability to capture spreads. While spread cash flows may be viewed as more volatile compared to its fee business, we believe this demonstrates the value of EPD’s extensive footprint. We continue to favor Enterprise given its asset base, attractive financial profile and reliable distribution.”
Akyol uses these comments to back up his Buy rating on EPD, while giving the stock a $33 price target. Should this target be met, a twelve-month gain of ~37% could be in store. (To watch Akyol’s track record, click here†
Judging by the consensus breakdown, other analysts are in agreement. 12 Buys and 2 Holds add up to a Strong Buy consensus rating. The shares have a current trading price of $24.08 and their $31 average price target implies ~29% gain from that level in the year ahead. (See EPD stock forecast 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.