So far this year, the stock markets are at full speed, with both the S&P 500 and the NASDAQ sitting just below their record levels. However, the picture may not be all roses and light.
Chief investment strategist Paul Dietrich predicts a slight recession in the USA for the markets of B. Riley Wealth Management this year – but also an S&P decline of up to 44%. Dietrich is known for advising his clients to exit stocks ahead of recessions and market downturns in 2000 and 2007.
Dietrich summed up his take on the current conditions: “Despite the fun and excitement of participating in the current Mardi Gras-like stock market bubble, which is completely unrelated to stock fundamentals, we assume that an investor will take the best part of a 49% decline or 57% in the S&P 500 Index and then re-enter the stock market when leading economic indicators and long-term moving averages indicate the recession is over.”
This is a recipe for a defensive portfolio bias, and some Wall Street analysts are currently recommending dividend stocks as solid buys. Div shares are the classic defensive investment in a difficult investment environment – and for investors who want to achieve a dividend yield of up to 13%, the analysts suggest two dividend stocks in particular. Let’s take a closer look.
Annaly Capital Management (ONLY)
We’ll start with Annaly Capital Management, a real estate investment trust (REIT) that focuses its business on residential real estate and mortgage-backed securities. The company is a leader in the mREIT segment with a market capitalization of $9.45 billion and permanent capital of around $11 billion. Annaly has a total investment portfolio of $73.5 billion, of which approximately $64.7 billion is held in the company’s “highly liquid” agency portfolio segment.
In addition to its extensive agency portfolio, Annaly also has major investments in residential lending and mortgage servicing rights. The larger of these two segments is the Residential Credit portfolio, valued at $6.2 billion, while the Mortgage Servicing Rights portfolio contains assets valued at $2.7 billion. These portfolio valuations are current as of the Company’s March 31 financial report for Q1 2024.
Also in its most recent financial release for the first quarter, Annaly reported GAAP net income of 85 cents per share. Non-GAAP available-for-distribution earnings were 64 cents per share, down a penny from a year earlier. The company generated an economic return of 4.8% in the first quarter and ended the quarter with a book value of $19.73 per share, higher than the $19.44 reported for the previous quarter.
Turning to the dividend, we note that Annaly announced a regular payment of 65 cents per common share on March 14th for a payout today (April 30th). This will be the fifth consecutive quarter that the dividend has been at this level, representing an annual yield of $2.60 per common share and a forward yield of nearly 13.6%, well above the current rate of inflation.
Analyst Merrill Ross reports on Annaly for Compass Point and takes a deep dive into the company’s portfolio performance in the first quarter. He notes: “The driving force behind the improvement in investment portfolio returns (from 4.55% in 4Q23 to 4.88% in 1Q24) was investing the low interest outflow into the current coupon rate of 6.25%. . NIM contracted from 158 basis points to 143 basis points in Q1 2024, but we expect it to widen from here as investment in assets with current coupons outweighs the increase in swap-adjusted funding costs as interest rates remain longer stay higher. Unlike its peers, NLY invests its margin capital more heavily in residential mortgage loans and low coupon MSRs, but is not afraid of missing out on the positive BVPS (book value per share) impact that would result from continued agency spread tightening MBS, which accounted for 58% of its equity allocation at the end of the period.”
In her conclusion, Ross continued: “We have adjusted quarterly developments to a more moderate pace for the remainder of the year and removed any Fed easing from our model.” Barring any unexpected exogenous events that could lead to volatility, “We expect NLY to deliver positive total returns over the next three quarters and create value through consistent dividends and moderate increases in BVPS.”
Ross quantifies her stance with a Buy rating on the stock, with a $22 price target that implies 15% upside potential for the coming year. Combined with the dividend yield, this stock’s total return over the next 12 months could be over 28%. (To view Ross’ track record, click here)
Overall, Annaly receives a Moderate Buy rating from analyst consensus based on 7 recent reviews, including 5 Buys and 2 Holds. Shares are trading for $19.09 and the average price target of $20.57 suggests the stock has a one-year upside potential of 8%. (See NLY Stock Prediction)
Delek Logistics (DKK)
From a REIT, we turn our attention to the energy sector, where Delek Logistics owns, acquires, constructs and operates a wide range of assets for the storage, transportation, distribution and marketing of crude oil and refined products. The company operates in the southern United States and its asset map extends across Texas and Louisiana, as well as Oklahoma, Arkansas and Tennessee.
On the hydrocarbon side of operations, Delek’s refining operations control four inland refineries in Texas, Louisiana and Arkansas capable of maintaining a throughput of 302,000 barrels per day. The company’s logistics system handles warehousing, transportation and distribution activities. In addition, Delek is known as a provider of asphalt technologies and materials, which are produced at seven plants in the company’s network.
Delek’s hydrocarbon activities make up the majority of the company’s business, but the company is also heavily involved in the production of renewable biodiesel. Delek operates three biodiesel plants with a production capacity of approximately 40 million gallons per year.
Delek’s last public quarterly financial report was released in February and covered 4Q23. For the quarter, Delek reported net sales totaling $254.15 million, missing forecast by $24.1 million and declining 5.5% year-over-year. On the bottom line, the company had net income of $22.1 million, equivalent to 51 cents per diluted common share. The previous year’s value was 98 cents per share, analysts’ expectations were 85 cents; The significant decline in net income was due to higher interest expenses and goodwill impairment recorded in the quarter. Another interesting metric is that the company generated quarterly free cash flow of $64.57 million, an increase of more than 25% year-over-year.
As for the dividend, Delek on April 25 declared a common share payment of $1.07 for 1Q24. This represents a year-over-year increase of 4.4%, and the annual payment of $4.28 Dollar gives a return of 10.8%. The dividend will be paid on May 15th.
This stock has caught the attention of Neal Dingmann, a 5-star analyst and energy industry expert at Truist Securities. Dingmann sees many reasons for investor optimism about Delek, particularly the company’s estimated future free cash flow and dividend yield, writing: “We believe the Delek Logistics Partners units have significant upside potential, driven by a combination of stable “, high-margin affiliate business coupled with growing third-party companies.” Party activity with increasing margins. We expect the partnership to generate significant, incremental FCF from the strategic business combination. We estimate the FCF yield in 2025 to be approximately 8% and the distribution yield to be approximately 12%. Our price target is based on an EV/’25EBITDA multiple of ~9.0x; all are among the best in their peer group…Furthermore, we believe an upcoming index rebalancing could provide additional upside in unit prices.”
These comments support Dingmann’s Buy rating on DKL, while his $46 price target indicates scope for a 16% upside in one year. Combined with the high dividend yield, this stock is on track to deliver a one-year return of nearly 27%. (To view Dingmann’s track record, click here)
There are only two current analyst reviews for Delek stock, but both are positive, giving the stock a Moderate Buy consensus rating. The shares are selling for $39.63, and the average price target of $45.50 implies they will gain 15% in the coming year. (See DKL stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is for informational purposes only. It is very important to do your own analysis before investing.