The big picture is looking up as we head toward the Christmas and New Year holiday season. Despite continued pressure from the coronavirus crisis, markets are rising. These gains come as, in the words of BTIG strategist Julian Emanuel, “The stock market extended November’s trend to start December. Along with favorable seasonal trends, accumulating positive vaccine headlines and the revival of stop-and-go stimulus negotiations with the introduction of a bi-partisan proposal helped investors focus on a more optimistic long term…”
That optimistic view has put investors in a bullish mood, and Wall Street’s analysts are rushing to find stocks that will provide returns commensurate with prevailing sentiment. One analyst, Eric Hagen, a colleague of Emanuel’s at BTIG, has focused on high-yield dividend stocks.
Dividend stocks are usually considered defensive moves, stocks that investors move into when markets turn south, in order to shore up portfolio returns. Hagen has pointed three buy-rated stocks with an excellent dividend yield exceeding 8%. We scoured the TipRanks database to see what other Wall Street analysts have to say about them.
Ellington Financial (EFC)
We’ll start with Ellington Financial, an REIT in the mortgage sector. This company focuses its investments in commercial and residential mortgage loans, equity investments, and mortgage-backed securities. This makes for a diversified portfolio that mitigates risk.
EFC shares are down 9% year-to-date, despite a significant gain since hitting bottom at the end of March. That gain has seen the stock rise ~120%, and erase most of the losses caused by the economic shutdowns last winter.
The company’s revenues, which turned negative in Q1 at the height of the pandemic scare, have returned to positive figures, and for Q3 were up to $48.25 million. EPS in the third quarter was 41 cents, a 5% sequential gain. Ellington finished the third quarter with a solid cash holding, reporting $126.8 million in cash on hand.
Having plenty of cash on hand allows Ellington to keep up the dividend payment, which is payed out monthly. In the most recent declaration, the company raised the common stock dividend by 11%, to 10 cents per share. This annualizes to $1.20 per share, and gives an impressive yield of 8.1%. This compares favorably to the 2.54% yield found among peer companies in the financial sector.
Covering the stock for BTIG, Hagen noted: “We think the diversification and strong expertise within a range of credit strategies are valuable in the current environment, particularly for companies with the infrastructure and pipelines in place to originate/aggregate non-Agency collateral and fund through securitization… we think there’s upside as the company demonstrates it has the capital and flexibility to be aggressive in building both non-QM and its non-Agency securities portfolio.”
In line with his comments, Hagen sets a Buy rating and a price target of $16.50, suggesting an upside of 10% for the coming year. (To watch Hagen’s track record, click here)
Overall, Wall Street agrees that this stock is a buying proposition. The analyst consensus here is a Strong Buy, based on 4 reviews that include 3 Buys and 1 Hold. (See EFC stock analysis on TipRanks)
Ellington Residential Mortgage (EARN)
Next up is Ellington Residential Mortgage. Like EFC above, this company is an affiliate of the Ellington Management Group, but where EFC is focused on the commercial sector, Ellington Residential focuses its activities on – you guessed it – residential mortgage-backed securities. The company specializes in packages whose principal and interest payments are guaranteed by the US government.
EARN reported a net income of $8.1 million for the third quarter, or 66 cents per share, with a cumulative net income for the first three quarters of $12.7 million, or $1.03 per share. The company has over $61 million in cash and cash equivalents available, along with more than $28 million in unencumbered assets.
Looking at the share performance, shares in Ellington Residential have fully reversed their losses from last winter, and then some. The stock is trading with a year-to-date gain of 26%.
The dividend on EARN is 28 cents per common share, a payment which the company has maintained since Q2 of last year. At the current payout, the dividend annualizes to $1.12 per common share, and brings a yield of 9.1%.
This is another high-yield dividend stock that BTIG’s Hagen recommends. The analyst writes of Ellington Residential: “We like the basis risk diversification that investors are able to pick up here, since most other Agency REITs hedge predominantly with swaps and Treasuries. We like it in part because we think it’s challenging for investors to find a dedicated long/short Agency strategy outside of a private vehicle at a competitive cost (about 3.5% of equity)… We think there’s room for scaling-up a strategy like this…”
To this end, Hagen rates EARN a Buy along with a $13.25 price target. This figure implies ~10% upside from current levels.
Overall, both recent stock reviews on EARN are Buys, making the analyst consensus rating a Moderate Buy. (See EARN stock analysis at TipRanks)
Dynex Capital (DX)
Last but not least is Dynex Capital, which has built a stable portfolio of mortgage-backed securities, with a focus on long-term returns for investors.
DX shares are currently trading just below their peak for this year, up 18% year-to-date. Gains since the beginning of April have fully erased losses taken early in the COVID crisis, and the stock has been rising steadily for 8 consecutive months now.
In the recent Q3 report, Dynex reported $40.7 million in net income, a powerful reversal from the net loss reported in the year-ago quarter. This translated to an EPS of $1.62. The company’s income is easily sustaining the dividend, which pays out at 13 cents per common share monthly, or 39 cents per quarter. The annualized rate, of $1.56, gives a yield of 8.75%.
Describing DX’s position in the MBS REIT market, Hagen says, “The Fed’s significant and direct liquidity support for Agency MBS and Treasuries has created the secondary effect of reducing the opportunity cost for investors to lever the most-liquid MBS. Although nominal Agency spreads have tightened, low interest rate volatility has enabled levered MBS investors to earn an especially attractive risk-adjusted return, mainly given the lower cost to hedge duration risk. The portfolio best-aligned with this backdrop we think is DX.”
“While the stock’s valuation is closer to NAV than for peers, we’re comfortable paying a little more here in order to acquire the flexibility that comes with its portfolio configuration, which we think makes it one of the best-prepared to respond to potential market volatility,” the analyst concluded.
Accordingly, Hagen rates DX a Buy and his $19 price target indicates a potential upside of 8% from current levels.
All in all, with 3 positive analyst reviews on record, the Strong Buy consensus rating for DX is unanimous. (See DX stock analysis on TipRanks)
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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.