As we approach the final quarter of 2022, investors are looking for an answer to one question: was June’s low the bottom for stocks, or do they have more room to go? It’s a serious question and there may not be an easy answer. Markets face a number of headwinds, from the high inflation and rising interest rates we’ve become accustomed to to an increasingly strong dollar that will put pressure on next quarter’s earnings.
Weighing in on current conditions from Charles Schwab, the $8 trillion brokerage firm, Chief Global Investment Strategist Jeffrey Kleintop notes these main factors of investor concern, before backing down firmly in favor of a bullish stance on high-yield stocks.
“We’re talking about characteristics of stocks that outperform across the board, and those tend to be value drivers and high-quality drivers. What I’ve focused on the most lately is the high dividend payers… They’ve done incredibly well and typically the high A dividend is a sign of good cash flow and a good balance sheet, and investors are looking for that,” Kleintop noted.
So, let’s take a look at two of the market’s dividend champs, the high-yielding dividend payers that Street analysts want going forward. According to the TipRanks database, both stocks hold Strong Buy ratings from the analyst consensus – and both offer dividends of up to 8%, high enough to offer investors a degree of inflation protection.
Ares Capital Corporation (ARCC)
First up is Ares Capital, a business development company (BDC) focused on the small and medium-sized business sector. Ares provides access to capital, credit and financial instruments and services to companies that would otherwise have difficulty accessing services from major banking companies. Ares’ target customers are the small businesses that have long been the drivers of much of the US economy.
On a macro level, Ares has outperformed the overall markets so far this year. The company’s stock is down – but only by 3% year-to-date. That compares favorably with the S&P 500’s 16% loss over the same time period.
Ares has achieved this outperformance through the quality of its investment portfolio. The company’s portfolio, at the end of calendar 2Q12, had a fair value of $21.2 billion and consisted of loans and equity investments in 452 companies. The portfolio is diverse across asset classes, industries and geographies, giving it a strong defensive cast in today’s uncertain market environment.
The company reported total investment income of $479 million in the second quarter, up $20 million, or 4.3%, from the prior quarter. That led to GAAP net income of $111 million and core EPS of 46 cents.
The latter two results were both down on the year – but more than enough to fund the company’s dividend, which was declared in July at 43 cents per common share, payable on September 30. The dividend is $1.72 annualized and yields 8.7%. In addition to the common stock dividend, the company will also pay a previously authorized special dividend of 3 cents. Ares has a history of maintaining reliable quarterly dividends since 2004.
Covering Ares for Truist, analyst Michael Ramirez describes the company’s recent quarterly earnings as “impacted by greater market volatility,” which led to “better attractive terms for new production companies combined with higher yields – leading to confidence for the increase in the ordinary dividend”.
Looking ahead, in more detail, Ramirez added: “We continue to expect the improvement in NII to provide a cushion between earnings and the regular and supplementary dividend until the second half of 2022. Furthermore, we expect the total portfolio performance to benefit from higher near-term interest rates with current Fed Fund futures expecting rates to rise by around 200 basis points in the second half of 2022.”
Analyst comments point to further outperform – and he backs them up with a Buy rating on the stock and a $22 price target that suggests confidence in a 12% one-year upside. Based on the current dividend yield and expected price appreciation, the stock has a ~21% potential total return profile. (To follow Ramirez’s history, Click here)
Overall, the consensus Strong Buy rating for ARCC is unanimous, based on 6 positive analyst reviews assigned in the past weeks. Shares are priced at $19.59 and the current price target of $21 implies a modest 7% gain from this level. (See ARCC Stock Prediction on TipRanks)
The Williams Companies (WMB)
The next company to look at, Williams Companies, is a major player in the natural gas pipeline. Williams controls natural gas, natural gas liquids and oil gathering pipelines in a network that stretches from the Pacific Northwest, through the Rocky Mountains to the Gulf Coast and across the South to the Mid-Atlantic. Williams’ primary business is the processing and transportation of natural gas, with secondary activities in crude oil and power generation. The company’s footprint is huge – it manages nearly a third of all natural gas use in the US, both for residential and commercial purposes.
The company’s natural gas business has delivered strong revenue and profit results. The most recent quarter, 2Q12, showed total revenue of $2.49 billion, up 9% year over year from the $2.28 billion reported in the previous quarter. Adjusted net income of $484 million led to adjusted diluted EPS of 40 cents. That EPS was up 48% year over year and came in well above the forecast of 37 cents.
Rising gas prices and solid financial results have boosted the company’s stock – and while the broader markets are down year-on-year, WMB shares are up 26%.
The company also pays a regular dividend, and in its most recent filing in July for a Sept. 26 payout, management set the payout at 42.5 cents. This marked the third consecutive quarter at this level. The dividend is $1.70 annually and yields 5.3%. Even better, Williams has a history of maintaining reliable dividend payments—never missing a quarter—since 1989.
This stock has attracted the attention of Justin Jenkins, a 5-star analyst from Raymond James, who writes about WMB: “Williams Companies’ (WMB) attractive combination of stability and operating leverage through G&P, marketing, production and of the project Execution is still underrated. WMB’s heavily covered, C-Corp., and natural gas demand-focused features (and supply-driven tailwinds in several G&P and Deepwater areas) position it well in both the near- and long-term as our point of view. Potential acquisitions and JV optimization offer additional catalysts throughout the year, enhancing the expected premium valuation.”
Jenkins continues to give WMB stock a Strong Buy rating and a $42 price target implies upside of 31% over the next 12 months. (To track Jenkins’ history, Click here)
Jenkins doesn’t see Williams as a strong buy. this is the consensus rating, based on 10 recent analyst reviews that include 9 buys and 1 sell. Shares have an average price target of $38.90, suggesting a ~22% one-year gain from the current trading price of $32. (See WMB Stock Prediction on 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.