Right now, the Federal Reserve’s move to monetary tightening and raising interest rates to fight inflation is old news. However, the latest inflation update, released earlier this week, showed an annualized CPI rate of 4.9% for April, indicating a month-on-month decline and a marked the lowest level in two years. This is a welcome improvement from the 9% inflation peak reached last June.
Slowing annualized inflation and general expectations that the Fed will use this data to justify suspending or even reversing its high rate policy have supported the stock market rebound this year. Year-to-date, the S&P has gained 8%, while the more volatile NASDAQ is up around 18%.
That’s the good news. But weighing in on UBS, chief investment officer Mark Haefele lays out reasons why the Fed might not cut interest rates as quickly as many investors hope.
“While inflation is moving in the right direction, we still see potential for disappointment among equity investors on the pace of Fed easing in the remainder of this year…. Inflation is still well above above the Fed’s comfort zone,” Haefele said.
A confusing environment like this is a recipe for a defensive position in stocks, and few defensive positions are better than high-yielding dividend stocks. Their combination of reliable passive income and inflation-proof returns ensures a solid return even in tough times.
With that in mind, we dug into the TipRanks database and identified two dividend-paying stocks that yield a substantial 10% return. According to some analysts, these stocks are currently trading well below fair value, with the potential for further gains. Let’s take a closer look.
Velocity Energy (VTS)
The first is Vitesse Energy, a non-operator with financial interests in oil and gas wells drilled in the United States. It’s simpler than it sounds – Vitesse acts as an investor, owning hydrocarbon wells while leaving the drilling and exploitation of oil and gas to third-party companies. Vitesse generates revenue from the development of non-operated assets in oil and natural gas. The company acquires leasehold properties and converts them into active drilling operations, tapping into cash flow from both leases and oil and gas production.
This has proven to be a healthy business mode and has been profitable for Vitesse over the past 10 years. The Company’s portfolio includes over 50,000 net acres and approximately 6,500 actively producing oil and gas wells. For most of its existence, Vitesse was privately held, and during that time it returned $124 million to its shareholders. The Jefferies Financial Group company became a public entity in January this year, and since then has pursued its capital return policy, using a high-yield dividend as a vehicle.
This dividend was last declared on May 4, for 50 cents per common share. The statement marked the company’s second dividend payout as a public entity. With an expected annualized rate of $2 per share, the dividend yields an impressive 11.3% yield, well above the current rate of inflation, ensuring investors a substantial real rate of return.
The dividend is supported by the company’s non-GAAP results, which came in at 53 cents per share for 1Q23, beating guidance of 29 cents. Vitesse’s first-quarter revenue and GAAP earnings results were less impressive, however. The company’s revenue of $57.96 million was $2.87 million below expectations, and the GAAP EPS result was a net loss of $1.67, well in less than the loss of 9 cents that had been forecast.
That doesn’t worry Northland analyst Donovan Schafer, who notes Vitesse’s adjusted EBITDA of $40.1 million beat consensus of $36.9 million and his estimate of $36.5 million. . Schafer goes on to describe recent earnings as “boring” and writes, “VTS is expected to be a stable dividend payer with an edge over time through commodity price exposure and opportunistic M&A. Trading at ~$18, the dividend is around 11%, which investors can collect while sitting in a position that gives exposure to upside commodity prices and limited downside…”
In Schafer’s view, this warrants a stock upgrade from Neutral to Outperform (i.e. Buy), and his price target of $23 suggests 1-year upside potential of around 30 %. Based on the current dividend yield and expected price appreciation, the stock has a potential total return profile of approximately 41%. (To see Schafer’s track record, Click here)
Overall, VTS stock earns a Strong Buy consensus rating from Street analysts, based on 3 unanimously positive reviews. The shares are trading at $17.72 and their average price target of $22.67 implies a gain of around 28% over the next 12 months. (See VTS Stock Forecast)
NuStar Energy (NS)
The second high-yielding stock we’ll be looking at is NuStar, a master limited partnership and one of the leading independent operators of pipelines and liquid storage for hydrocarbons and other hazardous chemicals. The company operates in the Americas and its network includes 9,500 miles of pipelines and 63 terminals and storage facilities. The company manages the transportation and storage of a wide variety of products, including crude oil and its derivatives such as gasoline and diesel, as well as renewable fuels, ammonia and specialty chemicals. The company can store up to 49 million barrels of liquids in its storage farms.
NuStar’s network includes refined products facilities on the West Coast, Northern Plains and Colorado-New Mexico-Texas, ammonia pipelines stretching from the Great Lakes region to the Gulf Coast, as well as as crude oil pipelines and facilities in Texas. In total, the company operates in 19 states. The hydrocarbons and chemicals business has been lucrative for NuStar, which brought in $1.62 billion in total revenue for 2021 and $1.68 billion in 2022.
The company released its 1Q23 results earlier this month. Overall income of $393.9 million was down 4% year-over-year and missed forecast by $47.98 million. The company’s bottom line fared better; the GAAP EPS figure of 61 cents was 47 cents above expectations, and the non-GAAP earnings figure of 24 cents per share was 8 cents above expectations.
On the dividend side, the payment of 40 cents per common share, declared last April, was paid on May 12. The annualized rate of $1.60 gives a return of 10.6%. This brings the advantage of a significant real rate of return; furthermore, NuStar has a long history of maintaining reliable dividend payments.
Justin Jenkins, 5-Star Analyst and Raymond James Energy Expert, provides a bullish outlook on NuStar, writing, “NuStar’s positive exposure to strong refined product demand fundamentals and inflation-linked rate escalations underpin our positive thesis. We believe core business remains on a positive trajectory, combined with continued solid, albeit slowing, growth in Permian collection activity and a reasonable outlook for Corpus Christi operations. With earnings momentum and the associated reduction in leverage (both absolute and relative), we believe NS may be a repricing story.
Jenkins’ comments here confirm his outperform (i.e. buy) rating and give the stock a price target of $20, indicating room for a 31% upside in the year to come. (To see Jenkins’ background, Click here)
Overall, NuStar Energy has 5 recent reviews from Wall Street analysts, with a 3 to 2 split favoring Buy over Hold and supporting a Moderate Buy consensus rating. The shares are trading at $15.26 and their average price target is $18.80; this combination indicates an upside potential of 23% over the one-year horizon. (See NuStar Inventory Forecast)
To find great stock ideas trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that brings together all of TipRanks’ stock information.
Disclaimer: The views expressed in this article are solely those of the analysts featured. The Content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
