We’ve seen two conflicting trends in the markets this year – a sharp drop, into bear territory, in the first five months, and a strong rally since the beginning of June. Both trends have been overlaid on increased volatility, creating a confusing market environment even when the buying kicked back in.
Along with the unpredictable stock market, we’ve had to deal with inflation at 40-year high levels and fast-rising interest rates as the Federal Reserve tries to put the brakes on prices. The result is predictable, and probably here already: a recession. How painful it will get is still up in the air.
At least one market expert believes we’re not out of the worst yet. Mike Wilson, chief US equity strategist from Morgan Stanley, has been consistently bearish all year, and he hasn’t changed that tune despite the current rally.
“Last month’s rally in stocks was powerful and has investors excited that the bear market is over and looking forward to better times… We think it’s premature to sound the all-clear with recession and therefore earnings risk is still elevated. For these reasons, we stayed defensively oriented in our equity positioning,” Wilson opined.
A defensive orientation will naturally lead investors toward dividend stocks. These income-generating equities offer some degree of protection against both inflation and share depreciation by providing a steady income stream.
Against this backdrop, some Wall Street analysts have given the thumbs-up to two dividend stocks yielding no less than 13%, or even better. Opening up the TipRanks database, we examined the details behind these two to find out what else makes them compelling buys.
Diana Shipping (DSX)
The supply chain has been in the news lately, for all the wrong reasons – including backups at major ports around the world. The first stock we’ll look at, Diana Shipping, is a company that had to deal with these issues directly, and has done so successfully. Diana Shipping is a major dry-bulk carrier on the ocean trades, operating a fleet of 35 vessels totaling some 4.5 million dry weight tons. These ships, with an average age of 10.5 years, operate globally, carrying the bulk cargoes that the world economy depends on, include iron ore, grains, and coal.
Diana showed a total of $74.5 million in charter revenue for 2Q22, up 58% from the $47 million recorded in 2Q21. Over the past year, the company has shifted from a net loss to a net profit. Income attributable to shareholders in Q2 this year came to $58.8 million, compared to a net loss of $1.4 million last year. The gains come from increased business as economies reopen. Diana also benefits from a high use-rate of its fleet, with the ships at sea under charter 99.1% of the time.
Looking at the company’s income on a per-share basis, we find that Diana reported a Q2 diluted EPS of 42 cents, a far cry from the mere 2-cent earnings reported in the year-ago quarter. The high earnings gave the company confidence to declare its dividend at 27.5 cents per common share. Diana paid out a dividend in the early 2000’s, but stopped it in 2008. The payment was restored in the fall of last year, and the current declaration, to be paid on August 19, will be the fourth since the dividend was resumed – and the third consecutive increase to the dividend payment. At the current rate, the payment annualizes to $1.10 per common share and yields a sky-high 17.7%.
5-star analyst Benjamin Nolan, covering Diana for Stifel, sees the company in a sound position to continue generating profits. Summing up his thoughts on the stock, he writes, “DSX posted another quarter of elevated earnings as they continued to benefit from the upturn in the dry bulk market driven by limited supply and ton-mile demand growth. With no capex, low leverage, and a nice backlog of contracted cash flow, they further increased their dividend this quarter to $0.275/share. Importantly, we do not expect dividends to remain this high indefinitely but do expect they should be at least $0.20/quarter through the end of 2023 meaning a healthy [13%] dividend yield as the company passes strong cash flows through to shareholders… Given the risk-reward, we would remain buyers of DSX shares.”
Nolan’s Buy rating on the shares comes with a price target of $7, suggesting a one-year upside potential of 17% from current levels. Based on the current dividend yield and the expected price appreciation, the stock has ~35% potential total return profile. (To watch Nolan’s track record, click here)
Overall, this small-cap shipping company has picked up 4 analyst reviews in recent weeks – and they are unanimous that this is a stock to buy, giving Diana a Strong Buy consensus rating. DSX shares are selling for $5.97 and their $7.65 average price target indicates 28% share gains lie ahead. (See Diana stock forecast on TipRanks)
AFC Gamma (AFCG)
Now we’ll shift gears and change our focus from shipping to cannabis. AFC Gamma provides financial services to cannabis companies, working to provide underwriting and financial diligence to a sector that must navigate a difficult regulatory landscape. In addition, AFC also offers real estate loans and other secured financial services to cannabis companies which, due to the patchwork of legal regimes, may have difficulty accessing banks. AFC Gamma aims to promote growth within the legal cannabis sector, doing so while operating as a real estate investment trust (REIT).
The company will release its 2Q22 numbers next week, but we can get a feel for its position within the industry by looking back at 1Q22. In the first quarter, AFC Gamma generated $11.9 million in distributable earnings, or 62 cents per common share. This was up 44% from the year-ago quarter, and marked the third quarter in a row of sequential EPS gains.
Rising earnings have fueled a rising dividend, and in June AFC Gamma declared its Q2 div payment at 56 cents per common share. This payment, sent out on July 15, annualizes to $2.24 and gives a solid yield of 13.7%. It’s important to note that the payment is well below the total distributable earnings, a clear sign that the dividend is sustainable at current income levels.
That’s one of the key points to this stock, in the eyes of JMP analyst Aaron Hecht, who writes of AFC Gamma: “We expect AFCG’s pace of investment to slow as market volatility has weighed on the stock and management indicated that it is not interested in raising equity below book. We see cannabis as being a cyclically resistant asset class, similar to tobacco or alcohol, and the capital provider stocks are not trading on fundamentals. We believe AFCG represents a unique opportunity here as the stock is currently yielding [over 13%] and once management fully deploys its capital the yield could expand toward 18%. At a minimum, investors should be able to collect a hefty dividend which we believe is sustainable.”
To this end, Hecht rates AFCG an Outperform (i.e. Buy) and sets a $25 price target to go along with that rating. At current levels, his target implies a 53% one-year upside potential for the stock. (To watch Hecht’s track record, click here)
Looking at the consensus breakdown, 3 Buy ratings and 2 Holds have been published in the last three months. Therefore, AFCG gets a Moderate Buy consensus rating. Based on the $22.81 average price target, shares could rise 40% in the next year. (See AFCG stock forecast 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.