Once again, we’re scanning the markets for high-value stocks. The key factors to look for are a solid upside potential combined with a high dividend yield. Today we’ll reverse course slightly, and point out three stocks that fit that profile – and show a lower-cost, more affordable point of entry for investors.
Of the possible value factors for an investment, the dividend yield is probably the most important. It represents a quickly available, and recurring, cash return on a stock investment. With the Federal Reserve’s key rate set in the 1.5% to 1.75% range, and Treasury bond yields typically running well below 2%, dividends offer income-minded investors a route toward higher returns.
While some big-name, high-profile stocks (Apple and Microsoft come to mind, along with Visa and Mastercard) offer token dividends yielding between 0.5% and 1.5%, and the average dividend yield among S&P-listed stocks is only 2%, there is no hard ceiling on dividend yields.
We’ve used the TipRanks Stock Screener tool to search more than 6,500 stocks to find stocks with high yields exceeding 5%, along with a considerable upside potential and a Strong Buy consensus view from Wall Street’s analysts. The Screener returned 35 stocks to fit the profile – here are three of them.
PacWest Bancorp (PACW)
First on our list is a bank holding company, PacWest. These holding companies exist are formed to control one or more banks, and take advantage of Federal Reserve regulations to raise capital – through stock issues, borrowing, or acquisitions – more easily than independent banks. PacWest, based in Los Angeles and holding a market cap of $4.4 billion, is the parent company of Pacific Western Bank. The subsidiary bank has 79 branches in southern and central California, along with one branch in North Carolina, and controls $21 billion in assets.
In the last four quarters, PacWest beat the earnings forecasts three times. The exception, however, was the most recent reported quarter – Q3 2019. In that report, the company showed an EPS of 92 cents, 2% below both the estimates and the Q3 2018 number. Revenues also missed expectations, with the $285.7 million reported 1.7% below the forecast, and almost 4% below the year-ago value. Despite the recent quarterly disappointment, PACW shares were up 22.5% in 2019.
Going back as far as 2011, PACW has a history of gradually raising its dividend payment. The current quarterly payout is 60 cents per share; the company raised it from 50 cents in February 2018, marking the third increase in seven years, and a 233% increase from the 2011 value. PACW’s dividend is reliable, too, and paid out regularly each quarter. The annualized value, $2.40, makes the yield a healthy 6.54%. Finally, at a payout ratio of 65%, the dividend is easily sustainable. All of this, taken together, makes PACW a true dividend champion.
Writing from Piper Sandler, Aaron Deer sees growth potential for both the bank and its holding company. He writes, “We expect solid yearend growth after a slower summer… We look for deposits growth to also hit a double-digit pace, with good inflows from both the community bank and venture division…. Operating expenses should remain well controlled but there could be a slight uptick from the new Colorado branch and bankers hired in that market… Some credit noise is possible but we think overall asset quality should remain healthy.”
Deer gives PACW a Buy rating with a $44 price target. At current share price levels, this indicates a 20% upside potential.
Deer’s is not the only bullish report PACW has received recently. The stock’s Strong Buy consensus rating is based on three reviews, all of which agree that this stock is a Buying proposition. At $36.68, the current share price is a bargain price, and the average price target of $41.67 suggests an upside of nearly 14%
City Office REIT (CIO)
Our next stock offers a slight variation on the value factors. With a lower share price and a higher dividend yield, CIO is both easier to enter and brings a better return. Neither of these factors is surprising, as City Office is a Real Estate Investment Trust (REIT), a company formed to purchase, own, and operate various types of properties – commercial, residential, industrial – or mortgage securities, and reap the profits. By law, REITs are required to return a high percentage of their profits to the shareholders, and usually use dividends to comply. As its name suggests, City Office focuses on metropolitan office spaces. The company operates mainly in the Southern and Western US.
City Office derives its profits from 66 office buildings in Tampa, Orlando, Dallas, Denver, Phoenix, San Diego, and Portland. The properties have total of 5.9 million square feet in net rentable area, and are located in some of the country’s faster growing urban centers.
Like many REITs, CIO reports earnings as funds from operations. In the most recent quarter reported, Q3 2019 the company gave an FFO of 29 cents per share, 6.4% below the forecast, but up 3.5% year-over-year. Revenues showed a stronger yoy gain, of 16%, and came in at $38.95 million – although that was still 1% below the estimates. CIO shares gained 41.6% in 2019, far outpacing the broader markets.
CIO’s dividend, at 23.5 cents quarterly, may not sound like much, but it annualizes to 94 cents and offers a very high yield of 6.96%. The company has paid out this dividend consistently since 2015, although it has not raised the payment in that time. The payout ratio, which compares the dividend to the quarterly earnings, is 81%, a typical value for REITs.
4-star analyst Mitchell Germain, from JMP Securities, is bullish on CIO, writing, “Our positive investment opinion is driven by market mix, with an emphasis on the Sunbelt, and a compelling value-add investment strategy, anchored on adding market scale, and finding smaller investments that have less institutional interest. Shares currently trade at 11.7x (2020e FFO/share), which compares to the office REIT sector average of 17.2x, keeping us positive on the investment…”
Hanold set a $15 price target with his Buy rating, indicating confidence in an 11% upside for the stock.
Like PACW above, CIO has three recent Buy reviews backing up its unanimous Strong Buy consensus rating. The stock’s $14.83 average price target indicates an upside potential of 9.8% from the $13.50 current share price.
Starwood Property Trust (STWD)
The last stock on today’s list is another REIT, this one focused on mortgage loans, mainly commercial mortgage-backed securities and other commercial real estate debt investment, but the company has also invested in similar residential mortgage loans and securities. With a market cap of $7.01 billion, and an investment portfolio exceeding $16 billion, Starwood is the largest commercial mortgage REIT in the US.
Starwood’s most recent quarterly report – again, for Q3 of last year – showed slightly mixed results, but was generally positive. EPS was down 1.8% from the year before, but the 52 cents reported met expectations. Total quarterly revenue, at $327.19, missed the forecast by 1.5%, but was up 14.5% year-over-year. Shares slipped 1% after the report, but have since gained 5.7%. Overall, STWD shares showed a 36.7% appreciation in 2019.
STWD’s dividend has been held steady at 48 cents since 2014. This quarterly payment translates to an annualized value of $1.92 and a strong yield of 7.72%. That yield is almost 4 times the S&P 500 average, and over 4 times the average return of Treasure bonds. Combined with the moderate share price of $24.88 and the strong appreciation in the past 12 months, this makes STWD an excellent investment value.
This stock’s solid performance attracted attention from Donald Fandetti, 5-star analyst from Wells Fargo. Fandetti initiated coverage of STWD with a Buy rating, saying, “We view STWD as one of the best positioned commercial real estate finance companies that also has a history of successfully incubating new businesses… STWD’s div yield is 600+ bps over the 10-yr yield vs historical 250-350 pre-crisis periods.”
Fandetti supported his view of STWD with a $26 price target, implying a modest 4.5% growth potential to the upside.
Starwood’s Strong Buy consensus rating is based on three Buys set in the past two months. As noted, shares sell for $24.88; the $26.50 average price target suggests an upside potential of 6.5% from that level.