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The new shortened week has begun with at least one major overhang removed as the debt ceiling battle appears to be behind us. Last weekend, House Leader McCarthy announced that he had reached a compromise with the Biden administration that was acceptable to his Republican caucus, and that a bill could go to a vote in Congress this week.
In other news, core inflation is still high, the labor market is strong and housing data may be moving up – all pointing to the Fed keeping rates high for longer. However, dropout rates, jobless claims and job openings point to a slower labor market. Overall inflation appears to be declining and the Fed’s high interest rates are triggering a credit crunch with a risk of recession – all pointing to a potential turnaround for the Fed this year.
With this as a backdrop, policymakers have plenty to think about, as Raymond James’ CIO Larry Adam points out. “As the economy’s glide path remains uncertain,” said Adam, “it begs the question: Are policymakers still satisfied with a final rate of 5.1% (the midpoint between the target range of 5.0% – 5.25% As a reminder, seven (out of 19) committee members expected Fed Funds to spike above 5.25% in the March dot, with a median forecast of 4.1% in 2024. Our economist believes that the Fed is, or should be, ready to raise rates this year, though no cuts are on the horizon.”
Meanwhile, Stephen Laws, Raymond James’s five-star analyst, has been looking for stocks he believes will outperform in the coming months, regardless of the macroeconomic environment. Laws specifically recommends some high-yield dividend stocks. So if you’re looking for a dividend stock that yields 15% to guarantee a return in the current environment, a few Laws picks might be just the ticket.
TPG RE Finance Trust (TRTX)
We start in the world of commercial real estate, with a Real Estate Investment Trust (REIT). These companies have long been known as dividend champions; they exist to buy, own, lease, operate and manage various real estate properties, and government regulators require them to pay back a large portion of the income directly to shareholders. Dividends are a common form of compliance.
TPG is typical of the breed, with its particular focus on commercial real estate. The company will invest in all major commercial real estate asset classes and its lending business is focused on large holding companies. The company provides loans in excess of $50 million and focuses on its operations in the top 25 commercial real estate markets in the US. A look at the map shows that TPG owns properties in California, on the East and Gulf Coasts from New England to Texas, and in the Midwest.
The company’s portfolio is currently valued at $5.3 billion. Of that total, 35% are in the East, 31% in the West, and just under 18% in the Southwest. The majority of TPG’s assets are in multi-family homes, which make up more than 45% of the portfolio. The company also has significant interests in office space (26.5%) and hotels (10.8%).
In the last reported quarter, 1Q23, TPG delivered earnings per share of 5 cents, based on $3.8 million of net profit attributable to common stockholders. This EPS figure, while remaining profitable, missed forecasts by 20 cents. On a positive note, TPG ended Q1 with plenty of liquidity – over $662 million available. Of this total, approximately $132 million was in cash and other readily available liquid assets.
The company’s assets supported the dividend, which was declared in March and paid in April at 24 cents per common share. At this rate, the dividend yields an impressive 15.7%.
In his coverage of Raymond James, top analyst Laws looks under the hood at TPG and finds cause for optimism. He is bullish on the dividend and believes the company is adjusting its portfolio construction to reflect current conditions.
“Given our estimates of our portfolio’s return, we expect TRTX to maintain its current dividend. Our Strong Buy rating reflects the attractive risk/reward ratio given attractive portfolio characteristics (floating rate senior loans, declining office exposure, high mix of non-mark-to-market funding and CLO reinvestment capacity) and relative valuation as equities trade at a material discount for colleagues,” Laws stated.
That Strong Buy rating is backed by a $9 price target implying a solid ~47% upside over the next year. Based on the current dividend yield and expected price increase, the stock has a potential total return profile of ~63%. (Click here to view Laws track record)
Now tune in to the rest of the Street, where based on 2 more Buys and 3 Holds, this stock claims a Moderate Buy consensus rating. The shares are selling for $6.11 and the $7.70 average price target suggests a one-year gain of 26%. (To see TRTX stock forecast)
Ares commercial real estate (ACRE)
The second dividend stock we’ll look at is Ares Commercial Real Estate, another REIT and another operator in the commercial real estate sector. Ares has a portfolio based on debt-related investments in commercial real estate and focuses on generating value and return for shareholders. The company has 53 loans in its portfolio, with a total of $2.5 billion in committed loan commitments.
The portfolio consists mainly of senior mortgages, which make up 98% of the total. In terms of property types, the company has created a diverse mix of investments. Office space and multi-family housing occupy the largest shares, at 38% and 23% respectively, but there are significant holdings in mixed-use (10%) and industrial properties (also 10%). Geographically, Ares has also diversified; 28% of properties are in the Southeast, 25% in the Mid-Atlantic/Northeast, 19% in the Midwest, and 17% in the West.
Ares reported some mediocre results in its latest financial release, from the first quarter of this year. On the top line, the company had total revenue from its portfolio investments of $26.5 million. This was an increase of $2.5 million, or 10.4%, from the same quarter last year, but it also missed the forecast by $1.75 million. Finally, while positive, non-GAAP EPS of $0.27 was 3 cents below estimates.
When it comes to dividends, Ares shines. The company has paid a dividend of 33 cents per common share since 2019 and has added a supplementary payment of 2 cents since 2021. The total current dividend, of 35 cents per common share, comes in at $1.40 year over year and yields an attractive 15.2%.
When we contact analyst Laws again, we see that he sees this company as a good investment despite the ongoing challenges. He writes: “We maintain our Outperform rating, which is based on ACRE’s attractive portfolio characteristics (floating rate senior loans, low leverage), our portfolio return estimates
, solid dividend coverage and our belief that the current valuation is an exaggerated reflection of potential losses in the portfolio. While there is a material benefit to our goal, we believe our Outperform rating is appropriate given our expectation of little or no growth in the near term and continued industry headwinds.”
In addition to the Outperform (ie Buy) rating, Laws’ $10.50 price target suggests there is room for a 14% price increase in the coming months.
Again, we’re looking at a stock with an average buy consensus score and 6 evenly split analyst ratings: 3 buy, 3 hold. Shares in ACRE are selling for $9.20 and their $10.10 average price target implies an annual gain of ~10%. (To see ACRE stock forecast)
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disclaimer: The opinions expressed in this article are solely those of the named analysts. The content is for informational purposes only. It is very important to do your own analysis before making an investment.
