Wall Street is on a roller coaster again, as investors try to navigate the path between high inflation and the Fed’s aggressive interest rate hikes. The former is raging – whether you blame Russia or Biden, the fact of high inflation can no longer be avoided – while the latter is rising – but whether it is rising fast enough to blunt inflation is yet to be determined.
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Jim Cramer, the well-known host of CNBC’s ‘Mad Money’ program, takes a hint from the bond market, where the US Treasury 2-year note is up to 4.3% lately. In Cramer’s view, this sharp rise in the mid-term Treasury note indicates further aggressive Federal Reserve action on interest rates – and that brings with it an increased risk of a general economic recession.
This, in turn, brings Cramer to a specific investment choice – high-yield dividend stocks. “You want to take shelter in the accidental high-yielders because their dividends will give you a cushion,” Cramer noted.
To find these ‘accidental high-yielders,’ Cramer screened the S&P 500 index, seeking out stocks off 30% or more from peak values and yielding 4% or better on the dividend.
Cramer gives several of these stocks his personal approval. We’ve pulled up the details on two of his picks from the TipRanks database, and we’ll look at them together with commentary from the Street’s analysts.
Devon Energy Corporation (DVN)
The first of Cramer’s picks that we’ll check out is Devon Energy, an Oklahoma City-based, independent, hydrocarbon exploration and production company focused on onshore assets in the US. Devon operates mainly in the Delaware Basin, one of the major oil and gas formations on the border between West Texas and New Mexico. But while the Texas ops make up the core of the company’s work, Devon is also active in Colorado, Montana, and Oklahoma.
Devon is in the midst of an expansionary move, and in early August the company announced a definitive acquisition agreement for Validus Energy, an operator in the Texan Eagle Ford formation. The acquisition is cash transaction, worth $1.8 billion, will be effective as of June 1, 2022, on its Q3 closing.
In the meantime, Devon has reported its 2Q22 financial results, and investors can take heart. The company had the highest revenues in over two years, at $6.27 billion, but that was just the top line. Drilling down, Devon reported net income of $1.9 billion, or $2.59 per diluted share. This was up from just 60 cents diluted EPS in the year-ago quarter, and is indicative of the rapid rise in the company’s revenues and earnings over the past 6 quarters. Even better, for investors, was the $2.1 billion in free cash flow reported for 2Q22, a company record for Devon.
That free cash flow is important because it guarantees funding of the dividend. The payment, on a fixed-plus-variable model, was last declared for a September 30 payout at $1.55 per common share. This was up 22% from the previous quarter, and the highest single dividend that Devon has ever paid. On an annualized basis, the div reaches $6.20 and yields 10.4%.
Giving the bullish view on Devon, Truist’s 5-star analyst Neal Dingmann notes the Validus acquisition as a net positive, but he sees the company as strong even without that.
“Devon continues to demonstrate highly successful operational results which when coupled with strong prices and contained costs, leads to record shareholder returns. The company once again paid out an all-time high dividend while simultaneously buying back shares and repaying debt,” Dingmann noted.
“We still receive investor questions whether DVN will continue with its strict capital discipline, with the short answer being that per share growth not absolute production growth will continue to be the mantra. So while the base dividend could increase further and share repurchases could expand, in our view all the factors should continue to add up to one of the best cash return models in the group,” the analyst added.
Going from these comments, Dingmann rates DVN a Buy, with a $115 price target implying ~92% one-year upside potential. Based on the current dividend yield and the expected price appreciation, the stock has ~102% potential total return profile. (To watch Dingmann’s track record, click here)
Overall, there are 10 recent reviews on DVN, and they are evenly split – 5 Buys, and 5 Holds. This gives the stock a Moderate Buy analyst consensus rating. Meanwhile, DVN shares are trading at $60.05 and their $83.79 average price target implies an upside of ~40% from that level. (See DVN stock forecast on TipRanks)
KeyCorp (KEY)
We’ll shift our focus now, as Cramer’s second high-yielding div stock is a Bancorp, KeyCorp, the holding company with ownership of KeyBank. This large-cap banking company operates through more than 1,000 full-service branches and offices, plus some 1,300 ATMs, in 15 states, and boasts over $181 billion in total assets.
That’s a strong foundation on which to support a business, and KeyCorp has been successful at doing just that for almost 200 years. The company offers a full range of banking services, including loans, savings and checking accounts, online and mobile banking, mortgages, wealth management – all the familiar banking needs – for retail, small business, and commercial customers.
In the recent second quarter of 2022, the company had total revenue of $1.8 billion, well in the $1.7 billion to $2 billion range it has hit for the past 8 quarters. On earnings, KeyCorp showed $504 million in net income, up 20% y/y, and EPS came in at 54 cents per diluted common share. This was down from the 72 cents reported in the year-ago quarter, but still solidly profitable – and more than enough to cover the 19.5 cent per common share dividend payment.
That dividend was last declared in July for the September 15 payment. At its current rate, the dividend annualizes to 78 cents and yields a solid 4.8%. The dividend’s long history of reliability – the company has never missed a payment, going back to 1990 – helps show why it kept Cramer’s interest.
KeyCorp has reformed its business practices in recent months, and 5-star analyst Gerard Cassidy of RBC sees this as a net positive.
“The rebuilt, de-risked, better-managed KEY is continuing to demonstrate to investors it is not the ‘old KEY’. This change can be seen in its strong credit metrics and diversified business model. Its ‘Targeted Scale’ strategy, not being all things to all customers but rather being relevant to customers that KEY wants to be relevant, has boosted shareholder returns, in our opinion. Additionally, its strong ‘right-side’ of the balance sheet will become more valuable in a rising interest rate environment. Lastly, KEY should continue to reward shareholders with robust capital action plans in 2022-2023,” Cassidy opined.
Cassidy quantifies his comments with an Outperform (i.e. Buy) rating, as well as a $29 price target that indicates potential for 79% upside in the next 12 months. (To watch Cassidy’s track record, click here)
Overall, KEY gets a Moderate Buy from the analyst consensus, based on 6 Buy ratings, 7 Holds, and 1 Sell. The stock’s average price target of $22.19 gives ~37% upside to the current price of $16.17. (See KEY 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.