There’s an old saying in the markets that you should ‘sell in May and go away.’ It’s a reference to long-noticed trend of summertime swoons, when market trading slows, or even dips, especially in August. Recent statistical research by CFRA research has quantified the phenomenon.
Since 1945, they say, August is the year’s third-worst month for returns on the S&P 500, on average. The trend is particularly marked in years when the index set record high levels in July. A report from LPL Financial adds another twist, noting that in postelection years when the White House changes partisan hands, the stock market hits its peak on August 6. There are the usual caveats, that these are numbers derived from measures of central tendency, rather than ironclad rules – the pattern tends to show that we may be in for a late-summer slowdown.
Bullish investors can always find a reason to buy, and late summer slowdown may just mean that dividend stocks will get a new relevance. These classic defensive plays give investors a two-fold return strategy – with a dividend payout stream to supplement the share appreciation. And while share appreciation can be a fickle thing, a reliable dividend payer ensures a constant income stream.
With this in mind, we’ve used the TipRanks database to pinpoint two reliable dividend stocks — big dividend payers that are currently yielding at least 8% and have a reputation for maintaining steady payments. Wall Street’s analysts say that these are solid stocks to buy. Let’s take a closer look.
NexPoint Real Estate Finance (NREF)
We’ll look first at a real estate investment trust (REIT), a class of company well-known for high dividends. NexPoint invests in mortgage loans on single- and multi-family rental units, and also owns a portfolio of storage facilities and commercial office spaces. NexPoint is based in Texas and operates in major metro hubs across the US.
NexPoint is relatively new to the public markets, having held its IPO in February of 2020, it has been public for less than two years. During that time, the company has had to deal with the corona crisis. The most recent quarter, 2Q21, saw EPS of 59 cents, which was below the previously issued guidance range of $0.62-$0.66, due to the unexpected repayment of a preferred equity investment as well as a small impact from a higher share count due to ATM issuance. However, 2Q GAAP earnings of $0.58 per share exceeded the guidance midpoint of $0.54 per share.
The company’s available cash has improved over the year, and management reported having 59 cents per share available for distributions. This compares favorably to the 42 cents reported in the year-ago quarter, and guarantees that the dividend, at 47.5 cents per common share, is sustainable. That dividend annualizes to $1.90, and gives a yield of 9.65%.
Baird analyst Amanda Sweitzer points out that the dividend is the key factor for investors here, writing: “NREF is guiding to 3Q21 Core Earnings per share of $0.61- $0.65, which brackets our $0.64 estimate. The midpoint of guidance implies dividend coverage increases to ~1.33x, and we believe there is room for additional dividend growth over time (although we believe management's current preference is likely to retain the capital to fund investments to the extent it is able under REIT rules). We continue to view NREF's current dividend yield as attractive and well covered.”
In line with those comments, and her view of an already strong dividend improving over time, Sweitzer rates NREF an Outperform (i.e. Buy) and sets a price target of $22, implying an upside of 12% for the year ahead. Based on the current dividend yield and the expected price appreciation, the stock has ~20% potential total return profile. (To watch Sweitzer’s track record, click here)
There are only two recent reviews on record for NREF shares, but they both agree – this is a stock to buy. Their agreement gives the shares their Moderate Buy consensus rating. NREF is trading for $19.65 and has an average price target of $22.25, suggesting an upside potential of ~13% for the coming year. (See NREF stock analysis on TipRanks)
Ares Capital Corporation (ARCC)
For the second stock, we’ll look at Ares Capital. This is a business development company and asset manager, with a focus on mid-market commercial clients. Ares makes capital, credit, and financing available to its clients, who may have difficulty accessing ready money and/or credit in financial markets more geared to the needs of larger corporations. Ares’ role in the financial world helps to keep small- to medium-sized enterprises going, a vital role considering the outsized role those sort of companies play in job creation.
Ares’ portfolio of investment includes 365 different companies, backed by 180 private equity sponsors. Taken in whole, the portfolio is worth over $17 billion. A plurality of the investments, 47%, is in first lien senior secured loans, with another 24% in second lien senior secured loans.
The quality of Ares’ business model can be seen in its earnings and revenue numbers. In the recent 2Q21 report, the company reported its best EPS and revenue of the past two years. At the top line, revenue came in at $532 million, up 48% year-over-year, while the EPS of $1.09 grew 65% over the same period. The EPS results was noted by management as the second-best in company history, and both earnings and revenues beat estimates.
The quality portfolio and strong earnings have boosted Ares’ shares, and the stock is up ~50% over the last 12 months. This is a favorable comparison to the 18% one-year gain on the S&P 500 index.
Ares last paid out its dividend in June, at 40 cents per common share. The next payment is scheduled for September, and has been bumped up slightly to 41 cents per share. This gives an annualized payment of $1.64 and a solid yield of 8.21%.
RBC’s 5-star analyst Kenneth Lee is bullish on ARCC, and writes of the company: “ARCC is a scale BDC player, has strong relationships with PE sponsors, and is thus well-positioned to provide debt financing solutions for PE sponsored transactions. Management indicated they are seeing a potential widening of ARCC’s market opportunity as larger companies look for direct lending solutions from well-capitalized financing partners. To be sure, ARCC is still focused on the core middle markets segment (most loans are to companies < $100mn in Ebitda), and ARCC remains very selective (only financing roughly 5% of the deals they are seeing).”
To this end, Lee rates ARCC an Outperform (i.e. Buy) along with a $22 price target. This figure suggests 10% upside to the stock. (To watch Lee’s track record, click here)
With Ares Capital, we get to an established stock with a significant record of Wall Street reviews. Of the 8 reviews on the shares, the Buy/Hold breakdown is 7 to 1, for a Strong Buy consensus rating. The shares are currently trading at $20; recent appreciation has pushed that value up close to the average price target, which at $21.17 implies a 6% upside. (See ARCC stock analysis on TipRanks)
To find good ideas for dividend stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
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.