By now, the Federal Reserve’s switch to monetary tightening, and higher interest rates to fight inflation, is old news. However, the latest update on inflation, released earlier this week, showed an annualized CPI rate of 4.9% for April, which indicated a month-over-month decline and marked the lowest level in two years. This is a welcome improvement from the 9% peak inflation hit last June.
The cool-off in annualized inflation, and broad expectations that the Fed will use this data to justify pausing, or possibly even reversing, its high-rate policy has supported this year’s stock market rebound. Year-to-date, the S&P has gained 8%, while the more volatile NASDAQ is up about 18%.
That’s the good news. But weighing in from UBS, chief investment officer Mark Haefele lays out the reasons why the Fed may not pull back on interest rates as quickly as many investors hope.
“While inflation is trending 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 the Fed’s comfort zone,” Haefele opined.
A confused environment like this is recipe for a defensive stock position, and few defensive positions are better than high-yield dividend stocks. Their combination of reliable passive income and inflation-beating yields ensures a sound return even in tough times.
Keeping this in mind, we delved into the TipRanks database and identified two dividend stocks that are generating a substantial 10% yield. According to certain analysts, these stocks are currently trading well below their fair value, with potential for further gains. Let’s take a closer look.
Vitesse Energy (VTS)
First up is Vitesse Energy, a non-operator that owns financial interests in oil and gas wells drilled in the US. It’s simpler than it sounds – Vitesse acts as an investor, owning hydrocarbon wells while leaving the oil and gas drilling and exploitation to third-party firms. 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 the leases and the oil and gas production.
This has proven to be a sound business mode, and has been profitable for Vitesse for the last 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 retuned $124 million to its shareholders. The company from the Jefferies Financial Group became a public entity in January of this year, and since then has continued its policy of capital return, using a high-yield dividend as the vehicle.
That dividend was last declared on May 4, for 50 cents per common share. That declaration marked the firm’s second dividend payment as a public entity. With a forward annualized rate of $2 per share, the dividend gives an impressive yield of 11.3%, far above the current inflation rate, ensuring investors a substantial real rate of return.
The dividend is supported by the company’s non-GAAP earnings result, which came in a 53 cents per share for 1Q23, beating the forecast by 29 cents. Vitesse’s Q1 results in revenue and GAAP earnings were less impressive, however. The firm’s top line of $57.96 million was $2.87 million below expectations, and the GAAP EPS result came in at a net loss of $1.67, well below the 9-cent loss that had been forecast.
This doesn’t worry Northland analyst Donovan Schafer, who notes that Vitesse’s adjusted EBITDA of $40.1M beat consensus of $36.9M and his estimate of $36.5M. Schafer goes on to describe recent earnings as ‘boring,’ and writes: “VTS is meant to be a steady dividend payer with upside over time from commodity price exposure and opportunistic M&A. Trading at ~$18, the dividend is ~11%, which investors can collect while sitting in a position that gives upside commodity price exposure and limited downside…”
In Schafer’s view, this justifies an upgrade for the shares, from Neutral to Outperform (i.e. Buy), and his price target of $23 suggests a one-year upside potential of ~30%. Based on the current dividend yield and the expected price appreciation, the stock has ~41% potential total return profile. (To watch Schafer’s track record, click here)
Overall, VTS stock gets a Strong Buy rating from the Street’s analyst consensus, based on 3 unanimously positive reviews. The shares are trading for $17.72 and their $22.67 average price target implies a gain of ~28% in the next 12 months. (See VTS stock forecast)
NuStar Energy (NS)
The second high-yield div stock we’ll look at is NuStar, a master limited partnership company and one of the leading independent operators of pipelines and liquid storage for hydrocarbons and other dangerous chemicals. The company operates in the continental US, and its network includes 9,500 miles worth of pipelines and 63 terminals and storage facilities. The company handles the transport 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 keep up to 49 million barrels worth of liquids in its storage farms.
NuStar’s network includes refined products facilities on the West Coast, the Northern Plains, and Colorado-New Mexico-Texas, ammonia pipelines stretching from the Great Lakes region to the Gulf Coast, and crude oil pipelines and facilities in Texas. In all, the company operates across 19 states. Hydrocarbon and chemicals activity has been lucrative for NuStar, which brought in $1.62 billion in total revenue for 2021, and $1.68 billion in 2022.
The company reported its 1Q23 results earlier this month. The top line result, of $393.9 million, was down 4% year-over-year, and missed the forecast by $47.98 million. The company’s bottom line performed 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 front, the payment of 40 cents per common share, declared this past April, was paid out on May 12. The annualized rate of $1.60 gives a yield of 10.6%. This brings the advantage of a sizable real rate of return; in addition, NuStar has a long history of maintaining reliable dividend payments.
Justin Jenkins, 5-star analyst and energy expert from Raymond James, sets out an upbeat outlook on NuStar, writing, “NuStar’s positive exposure to solid refined product demand fundamentals and inflation-linked rate escalators underpins our positive thesis. We think the core business remains on a positive trajectory, combined with still-solid, albeit slowing, growth in the Permian gathering business, and a reasonable outlook for Corpus Christi operations. With earnings momentum and the related leverage reduction (both absolute and relative), we think NS can be a re-rate story.”
Jenkins’ comments back up his Outperform (i.e. Buy) rating here, and gives the stock a price target of $20, indicating room for a 31% upside in the year ahead. (To watch Jenkins’ track record, click here)
All in all, NuStar Energy has 5 recent reviews from the Wall Street analysts, with a breakdown of 3 to 2 favoring Buy over Hold and supporting a Moderate Buy consensus rating. The shares are trading for $15.26 and their average price target is $18.80; this combination points to a 23% upside potential heading out to the one-year horizon. (See NuStar stock forecast)
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that unites all of TipRanks’ equity insights.
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.
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