“Don’t Fight the Fed” was Chapter 4 of investment legend Martin Zweig’s landmark book Winning on Wall Street. Zweig dedicated 40 pages to telling readers why they should “go with the flow” in relation to the Fed’s trend.
As Fed Chairman Jay Powell himself told us today, the Fed is committed to bringing inflation down even if it causes economic hardship. Powell had signaled that the Fed would likely continue to raise interest rates in the coming months, which could lead to a recession.
This is a tailor-made situation for defensive stocks. And that brings us to dividend stocks. This is a traditional defensive move, securing returns through the payment of dividends.
Against this backdrop, Wells Fargo analysts approved two dividend-paying stocks yielding around 8%. Opening of the TipRanks databasewe’ve looked at the details behind these two to find out what makes them attractive purchases.
Starwood Property (STWD)
We’ll start with Starwood Properties, a real estate investment trust (REIT) with a portfolio of over $25 billion spanning commercial, infrastructure and residential loans, as well as investments and services. The company is based in Greenwich, Connecticut and has offices in New York, San Francisco and Los Angeles. Nearly a third of the portfolio is focused on multi-family residences, and the company is one of the largest commercial real estate lenders in the United States.
Starwood’s revenues have been remarkably stable over the past two years, with slow incremental gains in sales. The most recent quarterly release, for 2Q22, showed $325.5 million in revenue, a total that supported distributable earnings of 51 cents per diluted share.
This last figure is important for yield-conscious investors, as it supports the company’s dividend payment. REITs as a group have long been known as the “dividend champions” and Starwood, with a reliable payout history dating back to 2011, is no exception.
The company pays a common stock dividend of 48 cents, well below the distributable earnings figure. The dividend was last paid in July and, at its current annualized rate of $1.92, yields 8.08%. This is only half a percentage point below the rate of inflation, giving investors some degree of protection against rising prices.
In his coverage of Starwood for Wells Fargo, the analyst Donald Fandetti takes a very optimistic view, writing: “Good quarter for STWD, and they are well positioned to weather a potential recession in our view. Although deal flow has been robust this quarter, management is positioning itself with some caution in the near term as it sees potentially even better opportunities on the horizon. We also expect to see more upside to the valuation of the Woodstar Fund portfolio given the rent increases.
Unsurprisingly, Fandetti gives STWD an overweight (i.e. a buy) position, while its $27 price target implies 15% year-over-year upside potential. (To see Fandetti’s track record, Click here)
It’s clear from Strong Buy’s unanimous analyst consensus rating – based on 6 recent reviews on file – that Wall Street analysts broadly agree with Wells Fargo’s view. The shares have an average price target of $27.33, indicating an upside of around 17% from the current trading price of $23.39. (See STWD stock forecast on TipRanks)
Golub Capital BDC (GBDC)
The next stock we’ll look at is Golub Capital, a business development company (BDC) that caters to middle-market companies that might otherwise have difficulty accessing capital. Golub had, as of June 30 this year, a portfolio worth around $5.6 billion, with debt and equity investments in 328 companies. Golub’s portfolio is comprised primarily of senior loans, with smaller investments in junior debt and equity. Almost a quarter of the total portfolio belongs to the software industry, with the healthcare and specialist retail sectors accounting for a further 15%.
Golub recently reported its results for the third quarter of fiscal 2022 and posted $97 million in revenue, up 19% year-over-year. The company’s earnings were 34 cents per share, an annual gain of 17%. Revenues and profits exceeded forecasts.
Current earnings are more than enough for Golub to maintain its dividend payout of 30 cents per share. The company raised the dividend to its current level late last year, and the next payment is scheduled for the end of September. The payout currently zeroes out at $1.20 per common share and earns 8.5%. This is equal to last month’s inflation rate.
Well Fargo analyst Finian O’Shea noted that Golub has accelerated its business over the past quarter, writing of the company, “BDC stepped on the accelerator this quarter, with leverage rising to 1.17x net (from 1.07x previously). ). This came less from unrealized brands ($41 million) than from net rollout ($278 million), as management leveraged its relatively good capital position.
A BDC with a solid strategy and a solid foundation is sure to have a good future, and O’Shea assigns an overweight (i.e. buy) rating to the stock, as well as a target price of $15.50 which suggests an upside potential of around 11% over one year. . (To see O’Shea’s record, Click here)
For now, Golub holds a Moderate Buy consensus rating from Street analysts, based on 2 Buy and 1 Sell review established in recent weeks. The shares are trading at $13.92 and their average price target of $15.33 implies an upside of around 10%. (See GBDC stock forecast on TipRanks)
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