2 Dividend Stocks Yielding at Least 7%; Analyst Says ‘Buy’

The stock market pulled back from all-time highs this week, as investors paused to consider just what’s been goosing stocks – and what the future may hold. A flood of stimulus cash, unleashed by the Biden Administration’s big spending bills, is set to push GDP growth to 9% for 3Q21, but next year looks like it will slip back as the spending runs its course. Economists are predicting 5.5% GDP growth next year.

This bodes poorly for cyclical stocks, which tend to reflect macro volatility. As Morgan Stanley’s chief US equity strategist Mike Wilson said, “Peak rate of change on economic data and earnings revisions… are all contributing to the deterioration in lower-quality, smaller-capitalization, and the more cyclical parts of the market.”

Dividend stocks, however, are more stable than the cyclicals, and while their average returns are lower, they offer the advantage of a steady return regardless of economic conditions.

B. Riley analyst Matthew Howlett has been looking into the real estate trust segment, a group of stocks long-known for dividends that are both high and reliable. Howlett pointed out two stocks, in particular, that are showing dividend yields in excess of 7% and deserve a ‘buy’ rating.

Ladder Capital Corporation (LADR)

We’ll take a step into the real estate investment trust (REIT) niche, with Ladder Capital, a specialist in commercial mortgages. Ladder has operations in 48 states, and 475 cities. The average loan size is $19 million, and the company has securitized or sold a cumulative total of $16.7 billion commercial loans. Operations are backed by company’s $5.9 billion in assets.

Ladder Capital has seen a series of headwinds in the past year. The corona pandemic, of course, was the major crisis – but for a commercial mortgage lender, the problem was broader. Loan customers were taking their own hits, and finding themselves unable to meet payments. As a result, Ladder saw its quarterly results in 2020 show deep declines, and greater volatility, when compared to 2019. On the positive side, Ladder finished the year 2020 with $1.25 billion in cash and cash equivalents.

The final quarter of 2020 saw top line revenues of $77.9 million, compared to $135.4 million in the prior year’s Q4. Distributable earnings, however, came in at $4.9 million – and the company declared a dividend of 20 cents per common share, which was paid out on April 15. This marked the fifth quarter in a row with the dividend at this level. The current payment annualizes to 80 cents per share, and gives a yield of 7%.

Despite the challenging economic environment, LADR shares are up an impressive 79% over the past 12 months. B. Riley’s Matt Howlett expects the momentum to continue, and sees Ladder with a firm foundation to move forward.

“[The] company’s loan originator has been a top CMBS loan contributor since the 2008-2009 financial crisis and is well positioned to contribute to LADR’s earnings growth as the conduit market rebounds post-pandemic,” Howlett noted.

Howlett especially likes the company’s cash position, noting that it “should allow the company to accelerate growth of its core investment portfolio.” The analyst sees “upside potential to the dividend (forecasted to increase to $1.05 in 2022) as originations ramp steadily and legacy higher cost debt (Koch/legacy CLO) pays down.”

Backing these comments with a Buy rating, Howlett sets a $14 price target to suggest room for 21% growth in the next 12 months. (To watch Howlett’s track record, click here)

Overall, Ladder gets a Moderate Buy rating from Wall Street’s analysts, based on 6 recent reviews that include 5 Buys – but also a single Sell. LADR shares are currently priced at $11.58, with an average target of $12.58 pointing toward 9% upside potential this year. The real attraction for investors here is the strong dividend yield. (See LADR stock analysis on TipRanks)

Cherry Hill Mortgage (CHMI)

The second stock we’re looking at, Cherry Hill, is another REIT, this one with a focus on the residential markets. Cherry Hill’s portfolio includes mortgage servicing rights, mortgage backed securities, and other mortgage assets in the residential market.

After a steep earnings drop in the first quarter last year, to a loss of $2.80 per share, Cherry Hill has seen sequential growth in the past three quarters. The fourth quarter of 2020 saw EPS return to positive values, with a print of 37 cents per share.

Like most REITs, Cherry Hill pays out a reliable dividend. The company has been maintaining the payments since the fourth quarter of 2014, adjusting it when needed to keep it in line with income. For the most recent quarter, the dividend was declared at 27 cents per common share, or $1.08 annually. At this rate, the dividend yields an impressive 11.5%.

CHMI’s strong defensive characteristics and attractive dividend yield drew it to the attention of B. Riley’s Howlett.

“[We] believe the portfolio is better insulated against basis risk and would perform better in a rising rate environment… We believe that CHMI’s strong liquidity profile… puts it in strong position to deploy capital accretively during 1H21,” Howlett opined.

The analyst continued, “We expect: 1) slower prepayment speeds and 2) declining servicing costs in 2H21 to be key drivers of higher core ROEs going forward. Our 12.5% ROE forecast for 2022 should allow the company to increase its quarterly dividend to $0.30 based on our model.”

In line with his upbeat outlook, Howlett rates Cherry Hill a Buy. His $11.50 price target implies that the stock has room to gain 21% in the next 12 months.

CHMI has slipped under most analysts’ radar; the stock’s Moderate Buy consensus is based on just two recent ratings; Buy and Hold. With shares trading at $9.43, the $10.75 average price target suggests room for a 14% upside. (See CHMI 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.