“Don’t Fight the Fed” was Chapter 4 in the landmark book by the legend Martin Zweig Victory on Wall Street. Zweig devoted 40 pages to explaining to readers why they should “go with the flow” regarding the Fed’s stance.
As we heard from Fed Chairman Jay Powell himself today, the Fed is committed to reducing inflation even if it causes some economic pain. Powell had signaled that the Fed was likely to continue raising interest rates in the coming months, and that could lead to a recession down the road.
It is a situation specially designed for defensive stocks. And that brings us to dividend stocks. This is a traditional defensive move, guaranteeing returns through dividend payments.
Against that backdrop, Wells Fargo analysts gave the thumbs up to two dividend stocks that yield around 8%. Opening up the TipRanks database, we dug into the details behind these two to find out what else makes them compelling buys.
Starwood properties (STWD)
We’ll start with Starwood Properties, a real estate investment trust (REIT) with a $25 billion-plus portfolio spanning commercial lending, infrastructure and residential, as well as investments and services. The company is headquartered in Greenwich, Connecticut with offices in New York, San Francisco and Los Angeles. Nearly one-third of the portfolio is focused on multifamily, and the company is one of the largest commercial real estate lenders in the US.
Starwood’s revenue has been remarkably flat over the past two years, with slowly growing earnings at the top. The most recent quarterly release, for 2Q12, showed $325.5 million on the top line, a total that supported distributable earnings of 51 cents per diluted share.
That last number is important to yield-oriented investors, as it supports the company’s dividend payout. REITs as a group have long been known as “dividend champions,” and Starwood, with a solid payout history stretching back to 2011, is no exception.
The company pays a common stock dividend of 48 cents, comfortably below the amount of distributable earnings. The dividend was last paid in July and at the current annual rate of $1.92 it yields 8.08%. This is only half a percentage point below the rate of inflation, and thus provides investors with a degree of protection against rising prices.
In Starwood’s coverage of Wells Fargo, analyst Donald Fandetti takes a highly bullish view, writing, “Good quarter for STWD, and they’re well positioned to weather a potential downturn in our view. While deal flow was strong this quarter, management is positioning itself with some caution in the near term as it sees potentially even better opportunities on the horizon. We also expect to see more upside in the valuation of the Woodstar Fund portfolio given the increase in rents.”
Not surprisingly, Fandetti rates STWD as Overweight (i.e. Buy), while the $27 price target suggests a one-year upside potential of 15%. (To follow Fandetti’s history, Click here)
It is clear from the consensus Strong Buy analyst rating – based on 6 recent ratings on file – that Wall Street analysts largely agree with Wells Fargo’s view. The stock has an average price target of $27.33, indicating ~17% upside from the current trading price of $23.39. (See STWD stock prediction on TipRanks)
Golub Capital BDC (GBDC)
The next stock we’ll look at is Golub Capital, a business development company (BDC) that targets middle-market companies that would otherwise have difficulty accessing capital. Golub had, as of June 30 this year, a portfolio worth ~$5.6 billion, with debt and equity investments in 328 companies. Golub’s portfolio consists primarily of first-lien loans, with smaller investments in junior debt and equity. Almost a quarter of the total portfolio is in the software industry, with the healthcare and specialty retail sectors making up another 15%.
Golub recently reported its results for the third quarter of fiscal year 2022 and it showed $97 million in the top line – an increase of 19% year over year. The company’s earnings came in at 34 cents per share, an annual gain of 17%. Both revenue and profit exceeded forecasts.
Current earnings are more than enough for Golub to continue paying a dividend of 30 cents per share. The company raised the dividend to its current level at the end of last year and the next payment is scheduled for the end of September. The payout is currently $1.20 per common share and yields 8.5%. This is equal to last month’s inflation rate.
Well Fargo analyst Finian O’Shea noted that Golub accelerated its activity in the recent quarter, writing of the company: “BDC stepped on the gas this quarter, with leverage rising to 1.17x net ( from 1.07x). This came from less unrealized markup ($41 million) than net growth ($278 million) with management taking advantage of its comparatively sound capital position.”
A BDC with a sound strategy and solid fundamentals is sure to have a bright future, and O’Shea sets an Overweight (i.e. Buy) rating on the stock, as well as a $15.50 price target suggesting ~11% upside possibility for one year. (To follow O’Shea’s history, Click here)
Golub currently holds a consensus Moderate Buy rating from Street analysts, based on 2 Buys and 1 Sell ratings set in recent weeks. Shares are trading at $13.92 and the average target price of $15.33 implies ~10% upside. (See GDC Stock Prediction at TipRanks)
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Denial of responsibility: The views 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.