You can get whiplash, trying to follow the market fluctuations these days. Volatility rules for now, as investors are pulling out of Big Tech – a move that is pushing the general markets down. The bearish sentiment comes as new COVID case numbers are falling, along with the weekly unemployment claims. Both are positive news bites for the economy, and will help to justify increased economic opening.
At the same time, a Congressional COVID relief package working its way through the legislative process promises a booster shot for consumer spending – and combined with a recent rise in oil prices, this has market watchers thinking about inflation. The result: the US Treasury’s 10-year bond has hit a yield of 1.48%, a one-year high. So investor money is pulling out of stocks, and heading over to bonds.
Overall, it’s a situation tailor made for defensive stocks. High-yield dividend plays are getting lots of love from Wall Street’s stock analysts, and are showing high upside potential as investors move toward them. These are the stocks that pad a portfolio, providing an income stream capable of compensating for low share appreciation.
Using TipRanks database, we’ve found two dividend plays that are yielding just above 7%. If that’s not enough, all three received enough support from Wall Street analysts to earn a “Strong Buy” consensus rating.
Sixth Street Specialty Lending (TSLX)
The financial sector is frequently a source of high-yielding dividend stocks, so it makes sense to look there. Sixth Street Specialty Lending is, as its name suggests, a player in the credit industry, where it is a provider of capital and credit financing for small- to mid-market companies. These small and medium enterprises are the traditional engine of America’s business sector, providing a majority of all jobs created, and specialty finance companies like Sixth Street are essential to their success.
Over the past year, two trends have been clear in Sixth Street’s performance. First, the company showed a steep drop earnings when corona hit, followed by a strong rebound in 2Q20, with the EPS figure falling since then back into line with historical norms. And second, the stock’s share price has regained value slowly but steadily since hitting bottom late last March.
A quick look at the numbers bears this out. TSLX showed an earnings loss in Q1 last year, but the 79 cents per share reported in Q4, while down 34% sequentially, was still up 41% year-over-year. The stock has also regained share price, rising 112% from its ‘covid panic’ trough.
Sixth Street’s stock saw a momentary spike earlier this month, when it announced the Q4 results, along with the latest dividend declaration. The company’s earnings and revenue met expectations, and management declared a 41-cent per common share base dividend, along with a $1.25 special dividend. Sixth Street has a history of using special dividends to supplement the base payment. At the current base rate, the dividend yields a robust 7.5%.
Raymond James analyst Robert Dodd is impressed with Sixth Street’s overall performance, but especially likes the dividend potential here. He writes, “With its recurring supplementals, a large special, and over-earning of the base dividend, we believe TSLX is aptly positioned to perform in a market where it is increasingly difficult to find yield…”
Dodd rates TSLX an Outperform (i.e. Buy), and his $23.50 price target suggests room for 8% share growth in the coming year. (To watch Dodd’s track record, click here)
Overall, it’s clear that Wall Street agrees with Dodd on Sixth Street’s quality – the stock has 5 recent reviews on record and all are to Buy, making the Strong Buy consensus rating unanimous. Share are priced at $21.67, and their recent appreciation has left room for just 6% upside under the average price target of $23. (See TSLX stock analysis on TipRanks)
Barings BDC, Inc. (BBDC)
Next up is Barings BDC, a business development corporation. Like Sixth Street, Barings provides financial services to middle-market companies. Barings’ services include capital access as well as asset management, and the company invests in debt, equity, and fixed income assets. The company boasted an investment portfolio worth $1.12 billion at the end of 3Q20, the last quarter reported.
That last reported quarter also saw Barings beat expectations on earnings. The 17-cent EPS was up 21% sequentially. The net assets from operations increased to 90 cents per share, an enormous gain from the 10 cents reported in the same metric one year prior. The company also showed $7.1 million cash on hand at the end of Q3.
Along with its secure financial situation, Barings has seen its share regain the value lost when the coronavirus first struck. The stock hit its lowest point on March 18 of last year; since then, the shares have rebounded 91%.
That was all Q3. In Q4, Barings completed a merger with MVC Capital. The stock deal will leave Barings’ shareholders owning 73.4% of the combined entity (which will use the Barings name), while MVC shareholders will own the remaining 26.6%. The enlarged Barings is expected to show $1.5 billion in assets under management; the 4Q20 report, due in March, will give the details.
Barings’ dividend reflects the company’s steady growth. In the past two years, management has kept the quarterly dividend payment growing, from 3 cents per share to the 19 cents declared earlier this month for payment in March. At 19 cents per common share, the dividend gives a yield of 7.8%.
In his note on the stock for Compass Point, analyst Casey Alexander showed his clear approval of the dividend announcement: “BBDC preannounced expected 4Q20 NII of $0.19 per share versus our estimate of $0.16 and consensus estimates of $0.17. This was clearly driven by improved earnings power on the Barings platform…”
In addition, Alexander sees the company making steady business gains, even without accounting for the MVC merger, writing, “Aside from the assets acquired from MVC Capital, BBDC originated $528M new investment commitments during the quarter. These commitments were spread across 24 new borrowers and 17 existing borrowers…”
Alexander’s upbeat comments are complimented with a Buy rating on the stock, and his $10.25 price target implies an upside of 5% for the next 12 months. (To watch Alexander’s track record, click here)
This is another stock with a Strong Buy analyst consensus rating based on a unanimous view; all three recent reviews are Buy-side. BBDC’s shares are selling for $9.66, and the average price target of $11 suggests a one-year upside of 13%. (See BBDC 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.