Over the past 12 months, the S&P 500 has returned its best performance ever – an increase of 80% from the end of March. But are the good times winding up? Some historical data suggests the bulls will keep running.
Since 1950, the market has seen 9 sustained one-year runs with a rolling return of 30% or better on the S&P 500. During these periods an average one-year gain of 40% has been recorded (the median is 34%) – and none of these bull markets has ever ended in its second year.
But according to Callie Cox, a senior investment strategist at Ally Invest, investors should not expect the same sky-high returns in the next 12 months as in the past 12 months.
"[I] Typically the bull market loses a little bit of steam in the second year … Expectations are starting to rise and making it harder for the market to … exceed everyone's expectations. a greater chance of disappointment about it. And to be clear, again, we're not calling for doom and gloom. We just think the market needs a breather in the next two quarters, "Cox said.
Of course, for yield-oriented investors, the prospect of lower sustained gains in equity appreciation will prompt to look at dividend stocks. Reliable, high-yield dividend payers provide a second stream of income to complement the appreciation of the stock and to ensure a solid return for investors.
With this in mind, we used the Investing Insights platform to identify three stocks that match a profile: a dividend yield of approximately 7% and a "Perfect 10" smart score.
The platform gives each stock a one-digit score, based on the sum of 6 separate factors. The factors used are known to correlate with future overperformance; when they line up, this is a strong indicator for buyers to consider. Let's take a closer look.
Owl Rock Capital ( ORCC )
We start with Owl Rock Capital Corp (NYSE :), one of the many specialty finance companies in the financial sector. These companies are generally located in the mid-market financial sector, where they make capital available for acquisitions, recapitalisations and general operations to medium-sized companies that do not necessarily have access to other sources of credit. Owl Rock's portfolio consists of investments in 119 companies, for a total amount of $ 11.3 billion. 96% of these investments are senior secured loans.
Owl Rock reported his 4Q20 and full year results in late February. The company posted fourth-quarter net profit of $ 180.7 million, which was 46 cents per share. This was up from 36 cents a share in 4Q19, up 27%. Investment income also increased, which was $ 221.3 million in the quarter, up 9% year-over-year. Full year investment income was $ 803.3 million, more than 11% more than in 2019. In addition, the company closed 2019 with more than $ 27 billion in assets under management.
Of particular interest to dividend investors, Owl Rock's board of directors declared a dividend of 31 cents per common share for the first quarter. This amount will be paid in mid-May and is consistent with the company's previous regular dividend payments. The annual rate of $ 1.24 gives a yield of 9%.
Also interesting about Owl Rock's dividend, the company paid out its sixth and final special dividend last December – related to the launch of the IPO in 2019. In 2019, ORCC paid out special dividends of 80 cents along with the regular dividend payments. Since its IPO in the summer of 2019, the company has kept its dividend reliable and met both regular and special payments.
Owl Rock caught the attention of Mitchel Penn of Oppenheimer, who sees the company as a solid investment with the potential to exceed estimates.
“We estimate earnings per share of $ 1.22 and $ 1.34 in 2021 and 2022 for ROEs of 8% and 9%, respectively. We expect Owl Rock to earn an ROE of 8.5%, and assuming an estimated cost of equity of 8.5%, we calculate a fair value of $ 15 / share or 1.02x book value, ”noted Penn. . “To achieve an ROE of 8.5%, ORCC will either need to increase its portfolio return from 8.4% to 9.0% or increase its leverage from 1x to 1.2x. It's also possible that it does a bit of both. Our model takes into account the increase in compensation costs from a fixed amount of 75 basis points to a base fee of 1.5% on assets and an incentive fee of 17.5% on income. "
Penn rates this stock as an Outperform (i.e., a buy), and its $ 15 price target suggests a 7% upside potential from current levels. However, the dividend yield is the real attraction here.
ORCC shares have received 3 recent ratings and all are for sale – making the Strong Buy consensus rating unanimous. This stock sells 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 :), we move into the energy midstream universe. Midstream is the necessary sector connecting hydrocarbon exploration and production with the end markets; midstreamers control the transportation networks that move oil and gas products. ET has a network of assets in 38 states connecting 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, reports came out on April 9 that the U.S. Army Corps of Engineers is unlikely to recommend closing the Dakota Access Pipeline (DAPL). This project, when completed, will move oil from the Alberta oil sands region through the US to the Gulf Coast; the Biden government wants to shut it down for environmental reasons, but the industry is fighting to keep it. And second, two of Enable Midstream's largest shareholders have approved a proposed merger, whereby ET will acquire Enable. The merger is expected to be worth $ 7 billion.
Earlier this year, Energy Transfer reported earnings per share for 4Q20 of 19 cents a share, on income of $ 509 million. While this year-over-year was lower than earnings per share of 38 cents reported in 4Q19, the recent result was a sharp turnaround from the 29 cent net loss reported in Q3.
The company's income supports the current dividend of 15.25 cents per common share. This comes to 61 cents on an annual basis, and gives a yield of 7.7%. The company has paid a quarterly dividend since the second quarter of 2006.
Analyst Spiro Dounis writes of this stock for Credit Suisse: “We updated our model to reflect the completion of the Enable Midstream acquisition in mid-2021. We see the deal as a positive contribution and see additional potential as a result of operational / commercial synergies. ET highlighted potential synergies around both ENBL's natural gas and NGL assets, noting that gas synergies can be realized quite quickly, while NGL opportunities are more long-term as legacy contracts roll. More than ~ $ 100mm of NGL rise in the coming years does not seem unreasonable in our view. "
Dounis also notes that the biggest risk to the company stems from DAPL, which may still be shut down by the Biden administration. Still, he rates the stock as Outperform (i.e. buy), with a $ 11 price target indicating a 39% rise over a year.
Wall Street analysts can be much controversial, but agreeing on a stock is a positive sign for investors to take note. That's the case here as all the recent reviews are on ET Buys, making the consensus rating a unanimous strong buy. The analysts have set an average price target of $ 11.60, indicating a ~ 47% increase from the current stock price of $ 7.94. (See ET Stock Analysis)
Oaktree Specialty Lending ( OCSL )
Last but not least is Oaktree Specialty Lending Corp (NASDAQ :). This company is one of many specialist finance providers that make mid-range loans and credits available to smaller businesses that would otherwise have difficulty accessing capital.
Last month, Oaktree Specialty Lending completed a merger with Oaktree Strategic Income Corporation (OCSI). The combined company, under the name OCSL, 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 allocation.
Oaktree closed 2020 with its fiscal first quarter, which ended December 31. In that quarter, the company increased its dividend payment by 9%, to 12 cents a share, or 48 cents a share on an annual basis. At this rate, the dividend yields 7.25% – marking the third straight quarter of a dividend increase. Oaktree has made reliable dividend payments for over three years.
One of the bulls is Kyle Joseph, a five-star analyst with Jefferies who has a Buy rating and a target price of $ 8 for this stock. His target implies room for 20% upside potential in the next 12 months.
“OCSL's conservative strategy over the years has finally paid off as the BDC uses dry powder for higher yielding investments. Credit performance remained solid during the MRQ, while fundamentals are encouraging … We believe that the BDC has sufficient liquidity to support short-term opportunities and believe the company is positioned to take advantage of the recent economic volatility, which was especially highlighted by the recent 9% increase in quarterly distribution … Longer term, we think that OCSL is an attractive investment, ”wrote Joseph.
In total, OCSL has received 3 recent Buy reviews, leading the analysts to rate the consensus of a Strong Buy. The stock is currently trading at $ 6.66 and the $ 7.33 average price target indicates a ~ 10% rise from that level. (See OCSL Stock Analysis)
For more ideas for stocks trading at attractive valuations, visit Investing Insights .
