The S&P 500 broke below 4,000 this week for the first time since late July. It makes investors wonder: Does this mark the low point of a roller coaster ride? Stocks rose all last year, fell from January to June, rallied from July to mid-August, and are now falling again.
According to Wells Fargo strategist Paul Christopher, it’s evidence that the stock rally is stalling. Christopher writes that “Cracks are appearing in financial market liquidity” and says of the S&P 500, “3,900 is the next key support level. Below that brings the June intraday low of 3,636 back into the discussion.
The key factor here, in Christopher’s view, is the Federal Reserve’s aggressive stance against inflation and Fed Chairman Jerome Powell’s determination, he said in his Jackson Hole speech, to keep raising interest rates until it is under control. inflation.
With inflation running at 8.5%, Powell’s position implies further rate hikes and market watchers expect the Fed to implement two more 75 basis point hikes this year. That would push the Fed’s key interest rate into a range of 4% to 4.25% and raise the risk that tighter money will push the economy into recession.
This will naturally cause investors to start looking for defensive stocks, and especially high yielding dividend earners. These are the typical defensive plays when markets turn south – the dividend provides some certainty of an income stream and in today’s environment, some protection against inflation.
With that in mind, we used TipRanks’ database to zero in on two stocks that show high dividend yields – at least 8%. Each stock also holds a strong buy consensus rating. Let’s look at what makes them so attractive to Wall Street analysts.
Saratoga Investment Corporation (SAR)
We’ll start with Saratoga Investment, a business development company. These companies invest in and provide credit and other financial services to middle market businesses – small to medium-sized businesses that may not qualify for traditional banking services. Saratoga’s customer base is made up of the type of company that has been the traditional driver of the US economy, the small businesses that create the most jobs.
Saratoga recently announced its financial results for the first quarter of fiscal 2023, the quarter ended May 31 of this year. As of that date, the firm’s portfolio was valued at $894.5 million and included investments in 45 companies. Of this total, approximately 80% are first lien term loans and 9.9% were common equity. The balance was spread over second lien loans, unsecured loans and subordinated notes.
This portfolio generated total investment income of $18.68 million in fiscal 1Q23, up 11% year-over-year. Per share, net investment income was 66 cents, up 37% year over year. With that level of income, Saratoga was easily able to cover its first quarter dividend of 53 cents per common share – and in fact, it increased its dividend payment by 1 cent in its fiscal quarter statement, to 54 cents per common share. The increased dividend will be paid on September 29.
At the new rate, the dividend is annualized at $2.16 per common share and yields 8.8%, just above the current rate of inflation – making the dividend high enough to ensure the SAR offers investors a positive actual rate of return.
Compass Point 5-star analyst Casey Alexander is impressed with Saratoga’s execution over the past few months, writing, “Saratoga Investment Corp has built a track record befitting a true growth BDC. SAR’s NAV has hit new all-time highs despite the COVID credit cycle… With its superior growth performance, SAR earns multiple premium of a “growth” BDC. We maintain our target P/NAV multiple at 1.00x. SAR is working through a period of lower average yields as well as some stressed credits in its portfolio. We still expect SAR to trade at a premium to its SAR peer group P/NAV of 0.81x, but a discount to those BDCs identified as “growth” BDCs.
Alexander believes this stock will continue to perform for investors and rates it a Buy, with a price target of $28.50 which suggests a ~19% potential for the stock to appreciate in the coming months. Based on the current dividend yield and expected price appreciation, the stock has a ~28% potential total return profile. (To follow Alexander’s history, Click here)
There is some indication that the Street is in line with the bulls here, because while SAR has only gathered 3 recent analyst reviews, all agree that this is a buy stock, making it a unanimous consensus Strong Buy rating. Shares are currently trading at $24 and their average target of $29.67 suggests a one-year upside potential of ~24%. (See Saratoga stock forecast at TipRanks)
Crescent Capital (CCAP)
The second stock we’ll look at is another BDC, Crescent Capital. This firm directs its activity to private middle market corporate clients, for whom it originates loans and invests in existing debt and equity. Over its lifetime, Crescent, which is billed as an alternative asset manager, has built a portfolio totaling $38 billion, comprised of original loans and existing debt and equity of the target investment base.
The majority of Crescent’s portfolio, just over 60%, consists of unitranche first lien loans, while another 26% consists of senior secured loans. The remainder of the portfolio consists of various types of debt and equity investments.
That portfolio supported net investment income of $15.5 million, or 50 cents per share for the second quarter of 2012, with adjusted net investment income reported at $12.7 million, or 41 cents per share. The company’s net asset value per share was $20.69.
Investors should follow these income numbers as they allow Crescent to cover its dividend payment. The next dividend, to be paid on October 17, is 41 cents per common share. That works out to $1.64 annualized and yields an impressive 9.4%. Crescent will also pay a pre-announced special dividend of 5 cents per common share on September 15.
Oppenheimer analyst Mitchel Penn has been covering this stock and sees the dividend and the company’s ability to thrive even as interest rates rise as key points for investors. He states, “Our model assumes that interest rates continue to rise and that the central bank does not reverse course. If that were to happen, management fee waivers through the end of 2023 would likely allow Crescent to earn enough to cover the $1.64 dividend, which implies a 7.8% ROE. If LIBOR were to increase by 100 bps, management estimates that NII would likely increase by $7.4 million, or $0.24 per share. After an incentive fee, we estimate $0.20. We have incorporated some of this rate increase into our model as appropriate.”
Moving on from these comments, Penn sets an Outperform (i.e. Buy) rating on the stock, along with a $19 price target, suggesting a 9% upside through the end of next year. (To follow Penn’s history, Click here)
This is another stock with a strong buy consensus consensus, based on 3 positive analyst reviews set in recent weeks. The stock’s average price target of $18.83 implies ~8% upside potential from the current trading price of $17.25. (See Crescent stock forecast on TipRanks)
To find good ideas for trading dividend stocks at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that brings together all of TipRanks’ stock information.
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.