Inflation, interest rates, and recession – these are the bogeymen of investing, and they’ve been watching over our shoulders for the past several months. We all know the story by now, the rate of inflation is running at generational highs, the Federal Reserve is hiking rates in an attempt to push back against high prices, and we’re in a technical recession after two quarters of negative GDP growth. At a time like this, investors are showing a growing interest in finding strong defensive portfolio moves.
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It’s a mindset that naturally turns us toward dividend stocks. These are the traditional defensive investment plays, offering steady payouts to shareholders that guarantee an income stream whether markets go up or down. The best dividend stocks will combine a high regular payout with a solid share appreciation potential, giving investors the best of both worlds when it comes to returns.
Wall Street’s analysts have been looking for just such investments, and have picked out several; using the TipRanks database, we’ve pulled up the details on two of these stocks – that are offering dividend yields of 13% or better. That’s more than enough, on its own, to assure a positive real rate of return, but each of these stocks also brings a double-digit upside potential to the table. Let’s take a closer look.
Angel Oak Mortgage (AOMR)
First up is Angel Oak Mortgage, a residential real estate financing company structured as a real estate investment trust (REIT) and focused on providing non-QM loans and other specialized mortgage solutions for brokers and borrowers who might otherwise have difficulty accessing the needed capital. The company uses a tech based application platform allowing for paperless submissions and easy tracking. Angel Oak is one of the largest non-bank, non-QM loan originators, and operates in 45 states.
The company’s revenues rose through Q1 of this year, but pulled back in Q2. The top line of $42 million was down 20% from Q1, but was up tremendously from the $1.9 million recorded in 2Q21. On earnings, the company reported a GAAP loss of $52 million, or $2.13 per diluted common share – but also reported distributable earnings of 90 cents per common share. That last number is important, as it supports the dividend.
The dividend here is generous. Angel Oak pays out 45 cents per common share, which annualizes to $1.80, is set for payment at the end of this month. At its current rate, the dividend yields 13.8%, well ahead of the inflation rate, most recently reported at 8.5%.
Wells Fargo analyst Donald Fandetti covers AOMR, and likes what he sees. Fandetti notes that distributable earnings came in well ahead of his own estimates, and writes of the company: “The non-QM loan market went through quite a difficult period in Q2, though it has improved a good bit over the past few weeks with the execution of several industry securitizations. While the economics on AOMR’s July securitization were weak, it’s a positive from a financing risk perspective. Fortunately, book value could rebound if credit spreads tighten in H2’22. While the credit markets remain uncertain… we see attractive secular growth in the non-QM mortgage market. And the dividend yield is [>13%], which we believe is sustainable despite the credit market pressures.”
Going along with these comments, Fandetti rates AOMR an Overweight (i.e. Buy), and his $15 price target suggests that a one-year gain of 18% lies ahead. Based on the current dividend yield and the expected price appreciation, the stock has ~27% potential total return profile. (To watch Fandetti’s track record, click here)
Overall, there are 3 recent analyst reviews on record for this stock, and they include 2 Buys and 1 Hold – for a Moderate Buy consensus rating. The stock is priced at $12.98 and its $16 average price target implies ~26% upside on the one-year horizon. (See AOMR stock forecast on TipRanks)
MFA Financial (MFA)
The second stock we’re looking at is MFA Financial, another specialty finance company in the real estate space. MFA is structured as a REIT, a class of company’s long known for their high-yielding dividends. MFA’s portfolio is composed mainly of residential whole loans, residential and commercial real estate securities, and MSR-related assets. At the end of 1H22, the company’s loan portfolio totaled well over $8 billion.
MFA saw a net interest income of $52.6 million in 2Q22, giving a reported GAAP net loss of $108.6 million for the quarter, or $1.06 per share. On the non-GAAP measure of distributable earnings, the company registered a positive $47.2 million, or 46 cents per common share. The distributable earnings supported MFA’s regular quarterly dividend.
In mid-June, MFA declared a 44-cent regular dividend, which was paid out at the end of July. This marked the third quarter in a row that the dividend has been paid out at that level, and continues the company’s post-COVID commitment to gradually increase the payment. MFA cut back its dividend to just 20 cents per share in the September 2020 quarter, and has raised it 3 times since then.
The current dividend payment annualizes to $1.76 per common share, and is fully supported by the distributable earnings per share. The annualized dividend yields an impressive 15.4%, far ahead of the current rate of inflation.
5-star analyst Stephen Laws, from Raymond James, sees the dividend as a key attraction for this stock, and writes, “We are increasing our 2022 distributable earnings estimate by $0.08 per share to $1.95 per share, primarily to reflect the 2Q beat as our 2H estimates are largely unchanged. For 2023, we are reducing our distributable earnings estimate by $0.18 per share to reflect more conservative portfolio leverage assumptions. We expect MFA to maintain the quarterly dividend of $0.44 per share.”
Laws’ comments back up his Outperform (i.e. Buy) rating on the shares, as does his price target of $15.50, which implies a solid 38% one-year upside potential. (To watch Laws’ track record, click here)
“Our Outperform rating is based on our outlook for attractive portfolio returns and increased focus on business purpose loans as well as the attractive risk-reward opportunity with shares current trading at ~70% of June 30 economic book value,” Laws summed up.
Overall, MFA receives a Moderate Buy rating from the analyst consensus. The stock has 5 recent reviews, including 2 Buys and 3 Holds. Shares have an average price target of $14.95, which suggests ~34% premium from the $11.19 share price. (See MFA stock forecast on TipRanks)
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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.
