Inflation, interest rates and recession – these are the bullies of investing, and they have been watching us for the last few months. We all know the story by now, the rate of inflation is running at generational highs, the Federal Reserve is raising interest rates in an attempt to put pressure on high prices, and we are in a technical recession after two quarters of negative GDP growth. At a time like this, investors are showing increasing interest in finding strong defensive portfolio moves.
It’s a mindset that naturally turns us toward dividend stocks. These are the traditional defensive investment plays, offering fixed payouts to shareholders that guarantee a stream of income whether markets rise or fall. The best dividend stocks will combine a high regular payout with a strong stock appreciation potential, giving investors the best of both worlds in terms of returns.
Wall Street analysts have been looking for just such investments and have picked quite a few. Using the TipRanks database, we’ve gathered the details on two of these stocks – which offer dividend yields of 13% or better. That’s more than enough, on its own, to ensure a positive real rate of return, but each of these stocks also brings double-digit upside potential to the table. Let’s take a closer look.
Angel Oak Mortgage (AOMR)
First is Angel Oak Mortgage, a residential real estate finance company structured as a real estate investment trust (REIT) focused on providing non-QM loans and other specialized mortgage solutions for brokers and borrowers who would otherwise have difficulty accessing needed capital. The company uses a technology-based application platform that enables paperless submissions and easy tracking. Angel Oak is one of the largest non-bank, non-QM loan originators and operates in 45 states.
The company’s revenue rose through the 1st quarter of this year, but fell in the second quarter. The $42 million top line was down 20% from Q1, but a huge jump from the $1.9 million recorded in 2Q11. On the earnings side, the company reported a GAAP loss of $52 million, or $2.13 per diluted common share – but also reported distributable earnings of 90 cents per common share. This last number is important as it supports the dividend.
The dividend here is generous. Angel Oak is paying 45 cents per common share, which works out to $1.80 on an annualized basis, and is set to pay out at the end of this month. At its current rate, the dividend yields 13.8%, well above the rate of inflation, which was most recently reported at 8.5%.
Wells Fargo analyst Donald Fandetti covers AOMR and likes what he sees. Fandetti notes that distributable earnings were well above his own estimates and writes of the company: “The non-QM loan market had a pretty tough time in Q2, although it has improved quite a bit in recent weeks with the execution of many of its securitizations. sector. While AOMR securitization financials were weak in July, they are positive from a financial risk perspective. Fortunately, book value could recover if credit spreads narrow in 2Q22. While credit markets remain uncertain… we see attractive secular growth in the non-QM mortgage market. And the dividend yield is [>13%]which we believe is sustainable despite credit market pressures.”
Along with these comments, Fandetti rates AOMR an Overweight (i.e. Buy) and the $15 price target suggests a year of 18% gains ahead. Based on the current dividend yield and expected price appreciation, the stock has a ~27% potential total return profile. (To follow Fandetti’s history, Click here)
In total, there are 3 recent analyst ratings recorded for this stock, including 2 Buy and 1 Hold – for a consensus rating of Moderate Buy. The stock is priced at $12.98 and the average price target of $16 implies ~26% upside over a one-year horizon. (See AOMR Stock Prediction on TipRanks)
Ministry of Finance (MFA)
The second stock we look at is MFA Financial, another specialist real estate finance company. MFA is structured as a REIT, a class of companies long renowned for their high dividend yields. MFA’s portfolio consists primarily of whole home loans, real estate and commercial real estate securities, and MSR-related assets. At the end of 1H22, the company’s loan portfolio was well over $8 billion.
MFA posted net interest income of $52.6 million in 2Q12, giving it a reported GAAP net loss of $108.6 million for the quarter, or $1.06 per share. Measuring non-GAAP distributable earnings, the company posted a positive of $47.2 million, or 46 cents per common share. Distributed earnings supported MFA’s regular quarterly dividend.
In mid-June, MFA announced a regular dividend of 44 cents, which was paid at the end of July. This marked the third consecutive quarter that the dividend has been paid at this level and continues the company’s post-COVID-19 commitment to gradually increase the payout. MFA cut its dividend to just 20 cents per share in the September 2020 quarter and has increased it 3 times since then.
The current dividend payment is $1.76 per common share on an annualized basis and is fully supported by distributable earnings per share. The annual dividend yields an impressive 15.4%, well ahead of the current rate of inflation.
5-star analyst Stephen Laws, from Raymond James, sees the dividend as a key attraction for this stock and writes: “We raise our 2022 distributable earnings estimate by $0.08 per share to $1.95 per stock, primarily to reflect Q2 pace as Our 2H estimates remain largely unchanged. For 2023, we are reducing our estimate of distributable earnings by $0.18 per share to reflect more conservative portfolio leverage assumptions. We expect MFA to maintain its quarterly dividend of $0.44 per share.”
Laws’ comments confirm his Outperform (i.e. Buy) rating on the stock, as does his $15.50 price target, which suggests solid one-year upside potential of 38%. (To follow Laws’ history, Click here)
“Our Outperform rating is based on our outlook for attractive portfolio returns and an increased focus on corporate loans, as well as an attractive risk-reward opportunity with shares trading at ~70% of economic book value as of June 30,” Laws summarized .
Overall, MFA receives a Moderate Buy rating from the analyst consensus. The stock has 5 recent reviews, including 2 buys and 3 holds. Shares have an average price target of $14.95, suggesting a ~34% premium from the $11.19 share price. (See Treasury stock forecast 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.