J.P. Morgan Says Buy These 2 High-Yield Dividend Stocks — Including One With 9% Yield

After a rough month from mid-February to mid-March, investors have reason for some positive sentiment in what’s been a highly volatile environment. Since hitting bottom on March 13, the S&P 500 has gained back 6.5%, and is back up to a 7.5% year-to-date gain. Increases have been even more impressive for the NASDAQ index, which rose 17% in Q1 – for its best quarterly performance since 2020.

But not so fast, says JPMorgan asset management CIO Bob Michele, who takes a cautious view of the long-term.

“You could have a feel-good period, and then the reality of the cumulative and lag catch up and slow the economy down… If we’ve been taught anything this past month, you may see it coming or you may not. You don’t know exactly where it’s going to hit. But once it hits, whatever you own, you own, and you have to hope that you own the stuff that recovers,” Michele opined.

JPMorgan’s stock analysts are taking that as a cue to point out solid defensive stock plays to weather a storm.

The defensive moves that the JPM analysts are recommending are high-yield dividend stocks, with long histories of keeping up reliable payment streams for dividend investors – and with yields well above average, even approaching 9% or better. Let’s take a closer look.

Energy Transfer (ET)

We’ll start in the hydrocarbon energy sector, taking a look at a midstream company, Energy Transfer. With a market cap of more than $38 billion, this is one of the largest midstream companies in North America. ET has an asset network that includes nearly 120,000 miles of pipelines for both crude oil and natural gas, in addition to export terminals, fractionators, gathering facilities, processing plants, and storage farms. While the network is centered around the Gulf Coast in Texas and Louisiana, the company also  has a heavy presence in Arkansas and Oklahoma, and its network branches out to Florida, the Mid Atlantic region, and the Great Lakes states.

In an interesting development, in late March Energy Transfer entered into a ‘definitive agreement’ for the acquisition of Lotus Midstream, a smaller competitor. The transaction, which is expected to be completed in 2Q23, is worth an estimated $1.45 billion and will add approximately 3,000 miles of pipelines for crude oil gathering and transportation. The additions to ET’s network will spread from the Permian Basin of Texas-New Mexico into Oklahoma.

In February, Energy Transfer reported its final quarter of 2022, with somewhat mixed results. The company’s top line revenue figure, of $20.5 billion, was up 10% year-over-year, and operating income rose over the same period from $1.7 billion to $1.8 billion. The company’s GAAP EPS came in at 34 cents per share, for a 5-cent y/y gain. On the negative side, however, the revenue figure missed the forecast by $3.31 billion, and the EPS was 3 cents below expectations.

Despite the misses, Energy Transfer’s distributable cash flow for 4Q22 rose y/y from $1.6 billion to $1.91 billion, and the company saw fit to bump up its common share dividend for the quarter – paid out on February 21 – by 15% quarter-over-quarter to $0.305. At this rate, the common share div payment annualizes to $1.22 per share and gives a yield of 9.5%, almost 5x the average found on the broader market.

In his coverage of Energy Transfer for JPMorgan, analyst Jeremy Tonet describes a firm with a solid position and sound outlook, writing: “ET continues to trade at discounted levels, offering an attractive entry point for long-term investors. While we continue to believe that ET’s dominant franchise, footprint, and full integrations will serve the partnership well over the cycle, we recognize the current industry oversupply in crude oil logistics has led to incentive pricing to secure market share.”

“We see a constructive macro backdrop driving new opportunities across ET’s business, particularly with the Mariner East and other NGL projects unlocking highly accretive growth. Most importantly, we see 2023 as a key transition year for ET, with leverage decreasing to a level that enables significantly more return of capital that can force the issue on valuation,” the analyst added.

In line with this bullish stance, Tonet gives ET shares an Overweight (i.e. Buy) rating, and his price target of $18 suggests a robust one-year upside potential of 40%. Based on the current dividend yield and the expected price appreciation, the stock has 49.5% potential total return profile. (To watch Tonet’s track record, click here)

Powerfully positioned energy companies typically get their fair share of positive Wall Street attention, and ET has 7 positive analyst reviews on file for a unanimous Strong Buy consensus rating. The stock is selling for $12.83 and its average price target of $16.86 implies a gain of ~31% over  coming year. (See ET stock forecast)

Philip Morris International (PM)

For our second JPM dividend pick, we’ll be shifting our focus to ‘sin’ stocks – an industry well-known for its reliable, high dividend payments. Philip Morris, a leader in the global tobacco industry, is known for its portfolio of leading cigarette brands. The company owns and markets the Marlboro brand outside of the United States (in the US, Philip Morris USA is a branch of Altria Group), along with its well-known eponymous Philip Morris cigarettes and other labels including L&M, Chesterfield, and Next. Philip Morris is active in 175 markets globally, and boasts that, in most of those markets, it holds the #1 or #2 position by market share.

Like many tobacco firms, Philip Morris has sensed which way the prevailing social and political currents are setting, and it is working to diversify its product lines toward a ‘smoke free’ future. In 2021, the company derived 29.1% of total revenues from smoke-free products, a share that increased to 32.1% in 2022. The company’s smoke-free lines include oral smokeless tobaccos meant to provide nicotine without the carcinogens and irritants of smoke, as well as e-vapor products and heated tobacco smoking substitutes. The company has invested more than $10.5 billion into the development of its smokeless tobacco product line.

Closing out 2022, Philip Morris reported a top line of $8.15 billion and a diluted EPS of $1.39 per share. Year-over-year, these figures were up from $8.1 billion and $1.37, respectively. Better, from an investor’s perspective, both figure beat forecasts by a wide margin; analysts had been looking for $7.5 billion in revenue and $1.29 in EPS.

From a defensive perspective, Philip Morris recently declared a dividend of $1.27 per common share, which is set for payout on April 11. Its annualized rate of $5.08 gives a yield of 5.2%. The company has been reliably paying out quarterly dividends since 2008.

Among the bullish is JPMorgan analyst Jared Dinges who lays out a solid case for Philip Morris to post gains going forward on its smokeless product line.

“We see Q123 as the low point for PMI growth (-5% CC EPS, full Q1 preview in the note), and believe the recent de-rating of shares provides an attractive entry point ahead of the re-acceleration of the business…. Over the medium to long term, as PMI crosses the threshold to become a majority smokefree company (which we anticipate in 2026), we see scope for valuation multiple expansion with the opportunity to have separate listings for the NGP and Tobacco business at some point, which we believe could create incremental value,” Dinges opined.

Looking forward, Dinges quantifies his bullish stance with an Overweight (i.e. Buy) rating, and predicts a 12-month upside of 19% through his $116 price target. (To watch Dinges’ track record, click here)

Elsewhere on Wall Street, the stock garners an extra 8 Buys, 3 Holds and 1 Sell, for a Moderate Buy consensus rating. The average target stands at $112.42, suggesting the shares will climb ~15% higher in the year ahead (See PM stock forecast)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a 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.