Inflation, interest rates, and recession – these are the bogeymen of investing, and they’ve been watching over our shoulders for the past year. We all know the story by now, the rate of inflation, at 6.4%, is still high, the Federal Reserve is hiking rates in an attempt to push back against high prices, and that could tip the economy into recession. 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 dividend yield with a solid share appreciation potential, giving investors the best of both worlds when it comes to returns.
Wall Street 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, which are offering dividend yields of at least 7%. 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.
EOG Resources (EOG)
We’ll start with EOG Resources, a major player in the North American hydrocarbon exploration and production industry – which is just a fancy way of saying that EOG is a big-name oil and gas producer. The company boasts a market cap of $70 billion, and has active operations in some of the richest oil and gas regions on the continent. EOG is particularly active in Texas, New Mexico, Oklahoma, and Louisiana, in the Eagle Ford and Anadarko formations, as well as areas in the north Plains, such as the Williston and Powder River basins.
EOG will report its next set of financial results, for 4Q22, later this week, but we can look back at Q3 to get an idea of where the company stands. That last release showed a top line of $7.59 billion, up 59% year-over-year, and a bottom line of $2.18 billion by non-GAAP measures. Per share, the net earnings came to an adjusted net income of $3.71. While this EPS just missed the $3.75 forecast, it was up significantly from the $2.16 reported in the prior-year quarter.
These numbers supported both an increase in the regular share quarterly dividend, from $0.75 to $0.825 cents, and a special dividend of $1.5. Taken together, the $2.325 dividend annualizes to $9.3 and yields 7.8%. The company has been paying out special dividends on a frequent basis since 2021, as part of a stated commitment to return capital to shareholders. Over the past three quarters EOG made three special dividend payments, ranging from $1.5 to $1.80 per share. However, it’s important to note that special dividends do not commit the firm to making similar payments in the future.
In coverage of this stock for Wells Fargo, 5-star analyst Roger Read sees the dividend here as a key point for investors. He writes, “EOG is one of the bellwether U.S. E&P stocks, given its track record of generating cash returns and paying dividends. In early 2022, management committed to returning at least 60% of annual FCF to shareholders via base and special dividends. The base dividend is a key component of this framework, while management has used special dividends in the past to return capital.”
Quantifying this for investors, Read rates EOG shares an Overweight (i.e. Buy), while setting a $167 price target that suggests a strong 40% upside for the coming months. (To watch Read’s track record, click here)
Read is bullish, but he is hardly an outlier on EOG. The stock has 13 recent analyst reviews, and those break down to 9 Buys and 4 Holds, giving the stock a Moderate Buy consensus rating. The shares are selling for $119.23, and the average price target of $158.67 implies a 33% one-year upside potential. (See EOG stock forecast)
MFA Financial (MFA)
From the energy industry, we’ll turn to a real estate investment trust (REIT). These companies, which buy, own, operate, and lease a wide range of real properties and mortgage assets, are well-known as perennial dividend champions. MFA Financial works mainly with residential whole loans, residential and commercial real estate securities, and MSR-related assets. The company’s portfolio totals some $8.2 billion, and has gained from loan amortization.
The company will release 4Q22 results this week, and in the meantime, we can look back at Q3 to set the background. At first glance, the numbers were not pretty.
In the third quarter of last year, MFA showed a net loss of $55 million. This was strongly unfavorable in comparison to the $132 million gain posted one year earlier. At the same time, the non-GAAP measure of distributable earnings came in at a positive value of $28.2 million, or 28 cents per common share. Year-over-year, however, distributable earnings were down 51%.
In response, MFA cut its dividend payment. The move came in Q4, and reduced the payment from 44 to 35 cents per share. However, even after the dividend cut, it gives shareholders a yield of 13.33%, strong by any standard.
Against this mixed backdrop, Credit Suisse analyst Douglas Harter, a 5-star analyst rated in the top 2% of the Street’s stock pros, believes that now is the time to pull the trigger.
Harter is attracted to MFA’s ‘risk-adjusted return potential given the current valuation,’ and goes on to write of the stock: “Our base case assumes that spreads are relatively unchanged over the course of 2023. The credit-focused mREITs have the potential to recover significant amounts of the 2022 unrealized book value losses given the discount to par of the current carrying value of loans. While the weakening of the housing market and economy will cause some level of credit losses, the majority of the discount is interest rate driven. Over the next couple of years as loans repay, this discount should be reversed and book value will accrete higher.”
In line with this stance, Harter rates MFA an Outperform (i.e. Buy) with a price target of $12.50. At current levels, his target implies a one-year upside potential of 19%. (To watch Harter’s track record, click here)
While this stock has only 3 recent analyst ratings on record, they break down 2 to 1 favoring Buy over Hold, for a Moderate Buy consensus rating. The shares are priced at $10.50, with a $12.33 average price target suggesting a 12-month increase of ~17%. (See MFA stock forecast)
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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.