These past 12 months have seen the S&P 500 return its best performance ever – an 80% gain as of the end of March. But are the good times wrapping up? Some historical data would suggest that the bulls will keep running.
Since 1950, the market has seen 9 sustained, year-long runs with a rolling return of 30% or better on the S&P 500. These periods have seen an average one-year gain of 40% (the median has been 34%) – and none of these bull markets has ever ended in its second year.
But investors should not expect the same sky-high returns in the coming 12 months as they have just seen in the last, according to Callie Cox, a senior investment strategist at Ally Invest.
“[I]t’s typical for the bull market to lose a little bit of steam going into year two… Expectations start rising and makes it harder for the market to… beat everybody’s expectations. And that leaves a greater chance for disappointment. And to be clear, again, we’re not calling for doom and gloom. We just think the market is due for a breather up in the next quarter or two,” Cox opined.
For investors focused on returns, the prospect of a lower sustained gain in share appreciation will naturally prompt a look at dividend stocks. Reliable, high-yield dividend payers offer a second income stream, to complement the share appreciation and ensure a solid return for investors.
With this in mind, we used the Investing Insights platform to pinpoint three stocks that meet a profile: a dividend yield around 7% and a ‘Perfect 10’ smart score.
The platform gives every stock a single-digit score, based on a summing up from 6 separate factors. The factors used are known to correlate with future overperformance; when they align together it’s a strong indication for buyers to consider. Let’s take a closer look.
Owl Rock Capital (ORCC)
We’ll start with Owl Rock Capital Corp (NYSE:ORCC), one of the financial industry’s myriad specialty finance companies. These companies generally inhabit the middle-market finance sector, where they make available capital for acquisitions, recapitalizations, and general operations to mid-market companies that don’t necessarily have access to other sources of credit. Owl Rock’s portfolio consists of investments in 119 companies, totaling $11.3 billion. Of these investments, 96% are senior secured loans.
Owl Rock reported its 4Q20, and full year results, at the end of February. The company saw Q4 net income of $180.7 million, which came out to 46 cents per share. This was up from 36 cents per share in 4Q19, a 27% increase. Also up was investment income, which at $221.3 million for the quarter was up 9% year-over-year. Full-year investment income was $803.3 million, up more than 11% from 2019. In addition, the company finished 2019 with over $27 billion in assets under management.
Of particular interest to dividend investors, Owl Rock’s board declared a 31-cent per common share dividend for the first quarter. This is payable in mid-May, and matches the company’s previous regular dividend payments. The annualized rate of $1.24 gives a yield of 9%.
Also of interest about Owl Rock’s dividend, the company paid out the sixth and final special dividend – related to the 2019 IPO launch – in this past December. In 2019, ORCC paid out for 80 cent special dividends, along with the regular dividend payments. The company has kept its dividend reliable, meeting both the regular and special payments, since going public in the summer of 2019.
Owl Rock caught the attention of Oppenheimer’s Mitchel Penn, who sees the company as a solid investment with potential to beat the estimates.
“We estimate EPS of $1.22 and $1.34 in 2021 and 2022 for an ROE of 8% and 9%, respectively. We project that Owl Rock can earn a 8.5% ROE, and given an estimated cost of equity capital of 8.5% we calculate a fair value of $15/share or 1.02x book value,” Penn noted. “To achieve an 8.5% ROE, ORCC will either need to increase its portfolio yield from 8.4% to 9.0% or increase its leverage from 1x to 1.2x. It’s also possible that it does a little of both. Our model accounts for the fee expense increase from a flat 75 bps to a base fee of 1.5% on assets and an incentive fee of 17.5% on income.”
Penn rates this stock an Outperform (i.e., a Buy), and his $15 price target suggest a 7% upside potential from current levels. The dividend yield, however, is the true attraction here.
ORCC shares have attracted 3 recent reviews, and all are to Buy – which makes the Strong Buy consensus rating unanimous. This stock is selling for $13.98 per share and has an average price target of $14.71. (See ORCC stock analysis)
Energy Transfer LP (ET)
With our second stock, Energy Transfer Equity (NYSE:ET), we move into the energy midstream universe. Midstream is the necessary sector connecting hydrocarbon exploration and production with the end markets; midstreamers control the transport networks that move oil and gas products. ET has a network of assets in 38 states, which link three major oil and gas regions: North Dakota, Appalachia, and Texas-Oklahoma-Louisiana. The company’s assets include pipelines, terminals, and storage facilities for both crude oil and natural gas products.
The big news for Energy Transfer, in recent weeks, comes from two sources. First, on April 9, reports came out that that the US Army Corps of Engineers is not likely to recommend shutting down the Dakota Access Pipeline (DAPL). This project, when complete, will move oil from Alberta’s oil sands region across the US to the Gulf Coast; the Biden Administration wants to shut it down for environmental reasons, but the industry is fighting to keep it. And second, two largest shareholders of Enable Midstream have approved a proposed merger, by which ET will acquire Enable. The merger is projected to be worth $7 billion.
Earlier this year, Energy Transfer reported 4Q20 EPS of 19 cents per share, on income of $509 million. While down year-over-year from the 38 cent EPS reported in 4Q19, the recent result was a strong turnaround from the 29-cent net loss reported in Q3.
The company’s income is supporting the current dividend of 15.25 cents per common share. This annualizes to 61 cents, and give a yield of 7.7%. The company has paid out a dividend every quarter since Q2 of 2006.
Covering this stock for Credit Suisse, analyst Spiro Dounis writes: “We updated our model to reflect a mid-2021 completion of the Enable Midstream acquisition. We view the deal as accretive and see additional potential upside resulting from operational/commercial synergies. ET highlighted potential synergies around both ENBL’s natural gas and NGL assets, noting that gas synergies could be realized fairly quickly while NGL opportunities are more long-term as legacy contracts roll. Upwards of ~$100mm of NGL uplift over the next several years doesn’t appear unreasonable, in our view.”
Dounis also notes that the main risk to the company arises from DAPL, which may still be shut down by the Biden Administration. Even so, he rates the stock an Outperform (i.e. Buy), with an $11 price target indicating a 39% one-year upside.
Wall Street’s analysts can be a contentious lot – but when they agree on a stock, it’s a positive sign for investors to take note. That’s the case here, as all of the recent reviews on ET are Buys, making the consensus rating a unanimous Strong Buy. The analysts have given an average price target of $11.60, indicating ~47% upside from the current share price of $7.94. (See ET stock analysis)
Oaktree Specialty Lending (OCSL)
Last but not least is Oaktree Specialty Lending Corp (NASDAQ:OCSL). This company is one of many specialty finance providers, making loans and credit available in the mid-market segment, to smaller firms that would otherwise have difficulty accessing capital.
Last month, Oaktree Specialty Lending completed a merger with Oaktree Strategic Income Corporation (OCSI). The combined company, using OCSL’s name, has more than $2.2 billion in assets. Oaktree’s investment portfolio totals more than $1.7 billion, primarily in first and second liens, which make up 85% of the company’s investment allocations.
Oaktree finished 2020 with its fiscal first quarter, ending December 31. In that quarter, the company increased its dividend payment by 9%, to 12 cents per share, or 48 cents per share annualized. At this rate, the dividend yields 7.25% — and marks the third quarter in a row of a dividend increase. Oaktree has kept up reliable dividend payments for more than three years.
Among the bulls is Kyle Joseph, a 5-star analyst with Jefferies, who puts a Buy rating and an $8 price target on this stock. His target implies room for 20% upside potential in the next 12 months.
“OCSL’s conservative strategy in recent years has ultimately paid off, as the BDC is deploying dry powder into higher-yielding investments. Credit performance remained solid through the MRQ, while fundamentals are encouraging… We believe the BDC has sufficient liquidity to support near-term opportunities and believe the company is positioned to take advantage of the recent economic volatility, which was particularly highlighted by the recent 9% increase in the quarterly distribution… In the longer term, we believe OCSL represents an attractive investment,” Joseph wrote.
Overall, OCSL has received 3 recent Buy reviews, making the analyst consensus rating a Strong Buy. The stock is currently trading at $6.66 and its average price target of $7.33 indicates ~10% upside from that level. (See OCSL stock analysis)
To find more ideas for stocks trading at attractive valuations, visit Investing Insights.