Dividend stocks are the Swiss army knives of the stock market.
When dividend stocks go up, you make money. When they don’t go up – you still make money (from the dividend). Heck, even when a dividend stock goes down in price, it’s not all bad news, because the dividend yield (the absolute dividend amount, divided by the stock price) gets richer the more the stock falls in price.
I’ve looked up two stocks that are offering dividends of ~10% yield – that’s more than 4x higher the average yield found in the markets today.
Each of these is Buy-rated, with some positive analyst reviews on record, and best of all, they all offer investors a low cost of entry, under $10 per share.
Let’s take a closer look.
Two Harbors Investment (TWO)
Looking at dividend stocks, it’s natural to start with a real estate investment trust (REIT), as these companies are known for their reliable, high-yield dividend payments. REITs focus their activities on the purchase, ownership, leasing, and management of real properties in the residential and commercial segments. They will also, as Two Harbors does, invest in mortgage-backed securities. Two Harbors has built the bulk of its portfolio through investments in residential MBSs.
REITs are required by Federal regulations to return a high percentage of earnings directly to investors, and they frequently use dividends to comply with that rule. Two Harbors is typical in this respect, and describes three considerations in its dividend policy: likely economic returns on the portfolio; taxable income; and sustainability of the payment. It’s no surprise then, that TWO pared back the dividend payment at the height of the COVID crisis to keep it in line with distributable earnings.
Since paring the dividend as low as 5 cents in April 2020, the company has raised it twice. The current payment, declared last month for 3Q21, is 17 cents per common share, or 68 cents annualized. This rate gives a yield of 10.5%, far better then the >2% yield found among dividend payers in the broader stock markets.
TWO has maintained its dividend at this level for a full year now, even though the company’s revenues and earnings have yet to recover to pre-COVID levels. The 2Q21 top line came in at just $41 million, and earnings were recorded at a loss of 48-cent EPS loss.
Even though the quarterly financial results disappointed, RBC analyst Kenneth Lee sees potential here.
“Despite disproportionate underperformance of high-coupon MBS assets in 2Q from spread widening and elevated prepay speeds, management believes high-coupon assets have favorable risk-adj returns going forward. TWO is in a strong position to take advantage of any potential investment opportunities in 2H or later due to potential Fed tapering,” Lee said.
The 5-star analyst added, “Combining a recent equity capital raise and liquidity on balance sheet, TWO is in a strong position to take advantage of potentially attractive investment opportunities in 2H of this year or later, if potential Fed tapering results in further mortgage spread widening.”
To this end, Lee rates TWO an Outperform (i.e. Buy), and his $7.50 price target implies ~15% upside from the current share price of $6.51. Based on the current dividend yield and the expected price appreciation, the stock has ~25% potential total return profile. (See TWO stock analysis on TipRanks)
BlackRock Capital Investment (BKCC)
Next up, BlackRock Capital Investment, is a capital investment firm catering to middle-market companies, offering ‘flexible financing solutions’ and making available a variety of secured and unsecured loan services. For investors, BlackRock, like other business development corporations, aims to bring in high and reliable returns from its portfolio.
Full story on TipRanks.com