After three winning sessions in a row, the stock market fell on Thursday when the weekly jobless claims came in below the expectations. That data point indicated continued tightness in the labor market, but the Federal Reserve has been hoping to see signs of a moderate increase in unemployment, to indicate that the anti-inflationary rate increases are taking hold. Barring that evidence, the Fed is likely to continue raising rates and tightening monetary policy, increasing the risk of recession.
The immediate result is increased market volatility. We’ve been on a roller coaster lately – and the combination of high inflation, rising interest rates, weak corporate earnings, and an unexpectedly tight labor market all pushing and tugging the markets in varying directions, shows that we’re not getting off of this roller coaster any time soon.
So for investors, seeking to build portfolios with some solid return potential, the key question to answer is, which stocks to buy? A defensive stance would seem appropriate, and that’s going to lead us toward high-yield dividend stocks.
The best of these feature a suite of positive attributes: Strong Buy consensus ratings from the Street’s analysts, solid return potential through share appreciation, and ultra-high dividend yields of 12% or better offering the prospects of a steady income stream at a real rate of return that will counteract inflation.
We’ve used the TipRanks database to pull up the details on two dividend stocks featuring just such attributes. Let’s take a closer look.
Capital Southwest Corporation (CSWC)
First up on our list is a small-cap business development company, Capital Southwest. This firm boasts a $1.1 billion portfolio of investments in lower middle market enterprise clients, and maintains the high quality of the portfolio through building relationships with borrowers and developing a responsive approach to client relations. Capital Southwest provides access to capital and credit for smaller businesses that would have difficulty making headway in the traditional large-scale banking system. CSWC currently has active investments in a solid stable of mid-market firms across a wide range of business segments.
Capital Southwest reported its results for fiscal 2Q23 this past October, with the headline number – net investment income – coming in at 52 cents per share, based on a total net investment income of $14.4 million. These numbers were up substantially year-over-year, with the EPS growing 21% and the total net investment income growing 48%. The bottom-line EPS matched the forecast, meeting analysts’ expectations.
The company did well on the balance sheet, too, finishing the quarter with total net assets of $475.7 million. This included cash and other liquid assets of $30.2 million.
These sound results supported Capital Southwest’s generous dividend, which was last declared, for the fiscal third quarter (ending on Dec 30) at 52 cents per common share. This is a regular base dividend payment; the company frequently adds to this a supplemental dividend, which was declared for fiscal Q3 at 5 cents per common share. Calculating from the base payment only, the dividend annualizes to $2.08 per share and yields a robust 12.1%, approximately 6x higher than the average among S&P-listed companies.
Covering the stock for JMP Securities, 5-star analyst Devin Ryan writes that he remains bullish on CSWC based on the 3Q figures, including among his reasons: “1) stable net asset value per share in a volatile market backdrop; 2) sequential improvement in non-accruals at cost; 3) 5% investment portfolio growth; and 4) meaningful yield improvement on a primarily first lien, floating rate investment portfolio.”
“We continue to expect strong core earnings growth from rising base rates and a larger investment portfolio will support the higher core dividend of $0.52/share. In short, we continue to view Capital Southwest as an attractive way to gain exposure to lower middle-market direct originations,” the analyst added.
Ryan complements his comments with an Outperform (i.e. Buy) rating, and a $22 price target implying a solid 28% upside on the one-year time horizon. Based on the current dividend yield and the expected price appreciation, the stock has ~40% potential total return profile. (To watch Ryan’s track record, click here)
Overall, there are three recent analyst reviews on file for Capital Southwest, and they all agree that it’s a stock to buy, making for a Strong Buy consensus rating. With a current trading price of $17.17 and an average price target of $21.33, this stock has a potential upside of ~24% for the next 12 months. (See CSWC stock forecast on TipRanks)
Genco Shipping & Trading Limited (GNK)
Next on our list is Genco Shipping, another small-cap firm – but one that should not surprise fans of high-yield dividend stocks, as the shipping industry is generally a good place to look for strong dividend returns. This US-based company is a drybulk shipowner, with a fleet of 44 vessels in the Supramax, Ultramax, and Capesize ranges operating on charter contracts. Genco’s ships ply the global oceanic trade routes, moving non-containerized cargoes such as iron ore, nickel ore, bauxite, cement, and grains.
That’s a profitable role in the world economy, and Genco has proven itself capable of remaining profitable despite a generally deteriorating global economic condition. In the last reported quarter, 3Q22, the company posted revenues of $136 million. While down 12% year-over-year, this still generated a net income of $40.8 million, and an adjusted diluted EPS of $1-even. Forecasts had predicted a much lower revenue total of $95.5 million.
The company also posted some solid cash numbers. The operating cash flow came in at $60.3 million, and the cash flow available for distribution was $33.1 million. That last is important to dividend investors, as it directly supports the payments.
On the dividend, Genco paid out, at the end of November, a common share quarterly dividend of 78 cents. This annualizes to $3.12, and gives a powerful yield of 20%. That’s about 10x the market average for dividend yields – and it’s almost triple the current rate of inflation.
Among the bulls is Noble 5-star analyst Michael Heim, who lays out a clear case for buying into Genco now, based on the company’s proven and potential ability to keep on delivering for investors.
“Genco, like most of the industry, is facing higher costs as labor, steel, and fuel costs rise. That said, shipping rates (even lower spot rates) are well above Genco’s break-even point of roughly $9,000/shipping day. The company continues to generate large significant free cash flow which it has used to reduce debt ($261 million since 2021) and pay a dividend ($2.74 per share in the last four quarters). Free cash flow will most likely decline in future quarters, but should be ample enough to continue to reduce debt and pay a dividend,” Heim explained.
Looking ahead from this stance, and putting some numbers on his outlook, Heim rates GNK shares an Outperform (i.e. Buy) with a $28 price target to suggest a strong upside potential of 82% by the end of next year. (To watch Heim’s track record, click here)
Overall, this small-cap shipper has picked up 5 recent reviews from the Wall Street analysts – and these are all positive, giving the shares a Strong Buy consensus rating. The average price target of $23.40 indicates room for ~52% growth from the current share price of $15.37. (See GNK stock forecast on TipRanks)
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a 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.