Analysts Say: Buy These 2 High Yield Dividend Stocks – Including One With a 26% Dividend Yield

The big market headline this year – all year long – has been the steady decline in stocks. The S&P 500 is down 20% for 2022 and the NASDAQ is down a disastrous 33%. And while recent data shows there may be some hope in terms of inflation, storm clouds could still be building up for next year’s stock market.

That’s the view of Mike Wilson, Morgan Stanley’s chief equity strategist. He’s been a leading voice among bears this year, and he’s not changing that tune as we head into the new year. In fact, Wilson sees the S&P 500 lose another 20% before bottoming out in 1H23 – a deep trough he believes will coincide with a sharp drop in corporate earnings. In Wilson’s words, “We’re looking for an earnings recession that could be as big of a surprise to the market as it was in ’08.”

We took the logical path – if Wilson is right – and went looking for defensive stocks. After all, if the first half of 2023 brings us higher interest rates, a deep recession and further losses on the stock market, now is the time to take protective measures on the investment portfolio. This brings us to the classic defensive game, high-yield dividend stocks, which offer two forms of protection at best: a steady stream of income and a rate of return that is faster than inflation.

We used the TipRanks database and focused on two stocks with ultra-high dividend yields. These are stocks that currently offer investors double-digit returns – 26% in one case – guaranteeing a real return. And even better, they both have a “Strong Buy” consensus rating from the wider analyst community. Let’s take a closer look at that.

Kimbell Royalty partners (KRP)

The first of the high dividend payers we’ll look at is Kimbell Royalty Partners, a Texas-based land and mineral rights firm with interests in all major onshore oil and gas production basins in the continental US. The company owns more than 16 million gross acres across 28 states. The company’s largest asset is in the Permian Basin in West Texas, where it owns more than 47,000 wells.

Kimbell saw mixed numbers in the third quarter of this year. The 3Q22 report showed a record production rate of 14,985 barrels of oil equivalent per day, an 8% increase from 2Q22. At the same time, sales fell successively due to a drop in realized oil prices. Total revenue was $74 million, down 7.2% from the second quarter, although up 49% year-over-year. Net profit attributable to common units (or shares) increased slightly quarter on quarter, from $36.3 million to $38.3 million; the figure a year ago was just $6.7 million.

Kimbell saw solid numbers in the third quarter of this year. The 3Q22 report showed a record production rate of 14,985 barrels of oil equivalent per day, an 8% increase from 2Q22. Total revenues were $74 million, up 49% year-over-year. Net income attributable to common units (or shares) increased strongly year over year, from just $6.7 million to $38.3 million.

The company’s dividend remains an attractive feature, with excellent returns. Cash available for distribution in the third quarter, supporting payment, was 66 cents per common share and the company paid a Q3 dividend of 49 cents per common share. This resulted in a payout ratio of 75% of cash available for distribution; the annualized payment of $1.96 gives an enviable 12.3% return. That return is more than 6x the average found among companies listed on the S&P list, and is more than 5 points better than inflation.

However, Kimbell’s biggest news recently was the acquisition of another Texas-based mineral rights company, Hatch Royalty. Kimbell bought Hatch for a total of $271 million, with $150.4 million in cash and the remainder in 7.3 million shares of Kimbell stock. The assets acquired were producing more than 2,000 barrels of oil equivalent per day as of October 1, all in the Permian Basin. Kimbell estimates it can extract ~2,500 barrels equivalent per day from these assets throughout the next year.

RBC Capital 5-star analyst TJ Schultz is impressed by Kimbell’s execution in recent months, writing:

RBC Capital’s 5-star analyst TJ Schultz is bullish on Kimbell, based on its recent acquisition of Hatch. Describing the company’s prospects and quality for investors, he writes, “We are pleased with KRP’s acquisition of Hatch Royalty LLC as it increases scale, increases exposure to an active basin and immediately contributes to DCF/unit. The deal expands KRP’s exposure to the Texas Delaware Basin, which will now be the leading basin in terms of production, number of active rigs, DUCs, permits and undrilled inventory. KRP continues to demonstrate its ability to execute M&A, which we believe is critical to the long-term viability of this asset class as public minerals remain a small percentage of the total addressable market.”

“KRP’s balance sheet remains in good shape and we see this as a buying opportunity given our raw materials outlook,” summarized Schultz.

With all that as a basis, Schultz gives Kimbell stock an Outperform rating (i.e. Buy), with a $24 price target to indicate potential for a strong 52% upside over the next 12 months. Based on current dividend yield and expected price appreciation, the stock has a potential total return profile of ~64%. (To view Schultz’s track record, click here)

Overall, this high-yield div payer has 4 recent analyst ratings on hand. All are positive, making Strong Buy’s consensus score unanimous, and the $24.25 average price target implies a one-year gain of ~52% from the current share price of $15.97. (See KRP stock forecast on TipRanks)

Star Bulk Carrier Corp. (SBLK)

Next on our list, Star Bulk Carriers is a Greece based company operating in the dry bulk ocean trade. Dry bulk is a vital part of the world’s transoceanic trade network, transporting large volumes of unpackaged goods, including items such as grains, metals and energy materials, over long distances. Star Bulk operates an on-the-water fleet of 128 bulk carriers ranging in size from the relatively small Supramax carriers of 52,000 dead weight tons (DWT) to the gargantuan Newcastlemax vessels capable of reaching 210,000 DWT.

Star Bulk was directly affected by the Russian war in Ukraine, as three of the company’s ships were stranded in that country’s Black Sea ports. However, during Q3, two of these ships were able to leave the war zone. The Star Helena and the Star Laura, both 82K DWT Kamsarmax vessels, have left the Black Sea. The third ship, Star Pavlinaanother Kamsarmax ship, is manned by a Ukrainian crew and remains in Ukraine.

Of interest to dividend investors, Star Bulk ended the third quarter with $392.7 million in cash on its balance sheet, enabling the company to declare a common stock dividend of $1.20 per share. The dividend was paid on November 29 of this year. At an annualized rate of $4.80 per common share, the dividend yields a sky-high 26%. A dividend yield of this magnitude guarantees a real return and is clearly an attractive feature of the stock. Star Bulk began paying its dividend in 1Q21 and has paid quarterly since then.

In reporting for Deutsche Bank, analyst Amit Mehrotra sees Star Bulk’s dividend as the most important point for investors. He writes, “Based on SBLK’s QTD-reported rates, we believe the fourth-quarter dividend can be maintained above $1.00 per share, despite rates being weaker. This would bring the full year 2022 dividend to more than $5.50 per share…in a year that we would characterize as about average for the dry bulk industry.

“This highlights the resilience of the dividend policy, even in times of interest rate pressure, and supports our very positive stance on equities. The bottom line is that this performance is not the result of luck or chance, but rather is the product of several years of good financial discipline and capital allocation. That’s why SBLK stocks have outperformed most maritime stocks in recent years, in our view,” the analyst added.

All this adds up to Mehrotra’s buy rating on the stock. He gives the stock a one-year price target of $33, suggesting robust upside potential of ~73%. (To view Mehrotra’s track record, click here)

Overall, Star Bulk recently caught the attention of 4 Wall Street analysts, and their ratings are unanimously positive, for a Strong Buy consensus rating for the stock. With a current trading price of $19.15 and an average price target of $29.33, SBLK shares show potential gains of ~54% by the end of next year. (See SBLK stock forecast on TipRanks)

To find great ideas for dividend stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that unites all of TipRanks’ stock insights.

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.

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