We’re facing a storm of volatility, as a series of short rallies have added a layer of confusion on top of the year’s bearish trends. The combination of headwinds – high inflation and rising interest rates, a probable recession around the corner – are threatening a stagflation that hasn’t been seen since the 1970s.
Writing on current conditions from Morgan Stanley, chief US equity strategist Mike Wilson lays out reasons for investor patience, in his forecast of where the main indexes are likely headed: “We think 4000 on the S&P 500 is a good guess and we would not rule out another attempt to retake the 200-day moving average, which is about 4150. While that seems like an awfully big move, it would be in line with bear market rallies this year and prior ones.”
Getting down to bottom line, Wilson adds, “We think a tradable bear market rally has begun last Thursday… The final price lows for this bear are likely to be closer to 3000-3200 when companies capitulate and guide 2023 forecasts lower during the fourth quarter earnings season that’s in January and February.”
The key here may be a combination of patience and a defensive strategy, which will naturally lead investors toward dividend stocks. These income-generating equities offer some degree of protection against both inflation and share depreciation by providing a steady income stream.
Against this backdrop, some Wall Street analysts have given the thumbs-up to two dividend stocks yielding no less than 9%. Opening up the TipRanks database, we examined the details behind these two to find out what else makes them compelling buys.
Chesapeake Energy Corporation (CHK)
First up is Chesapeake Energy, an Oklahoma-based, $11 billion exploration and development company in the US hydrocarbon sector. Chesapeake holds major assets in the Eagle Ford formation of Texas, the Haynesville formation of Louisiana, and the Marcellus shale in Pennsylvania; all three of these are among the richest petroleum and natural gas production regions in North America. Chesapeake’s land holdings had, as of the end of last year, more than 1.59 million barrels of oil equivalent in proven reserves, including 23% petroleum, 69% natural gas, and 8% natural gas liquids.
Chesapeake will release its 3Q22 numbers on November 1, but we can look back at Q2 for a snapshot of the company’s status. To start with, Chesapeake has seen rising revenues for the past year, and in Q2 brought in $729 million in adjusted net income, with an adjusted EPS of $4.87 per diluted share. Along with this, Chesapeake saw net cash from operating activities of $909 million, with $494 million in adjusted free cash flow.
The company’s cash flow supported a high dividend payment for common stock shareholders, with a base payment in Q2 of 55 cents and a variable payment of $1.77, for a total dividend of $2.32 per common share. The annualized base payment, at $2.20 per share, is up 10% from last year. Calculating forward, the total Q2 dividend of $2.32 annualizes to $9.28 and gives a yield of 9.3%. That yield is higher than the 8.2% annualized rate of inflation, and more 4x higher than the average dividend yield found among S&P-listed firms.
Lloyd Byrne, 5-star analyst with Jefferies, initiated coverage of CHK earlier this week, setting a Buy rating on the shares and a $150 price target that indicates confidence in ~52% upside for the year ahead. (To watch Byrne’s track record, click here)
Backing his bullish stance, Byrne writes: “Chesapeake’s scale and inventory depth with focus on US natural gas should allow for robust FCF generation and support the peer-leading shareholder returns. This coupled with an improving acceptance of global gas as a critical aspect of the transition, increasing US LNG exports, and a clear company strategy with attractive valuation makes CHK one of the most attractive risk/reward opportunities within North American energy, in our view.”
Byrne’s take on Chesapeake is bullish – and he’s far from the only bull on the stock. CHK has 7 recent analyst reviews, with 6 Buys and 1 Hold for a Strong Buy consensus rating. The shares are priced at $98.84 and their $133.29 average price target implies ~35% one-year upside potential. (See CHK stock forecast on TipRanks)
Sixth Street Specialty Lending (TSLX)
The second dividend stock we’ll look at is Sixth Street Specialty Lending, a business development company (BDC), investing in loans and equity to middle-market enterprise customers, giving its customers access to capital outside of the traditional banking system and profiting on the returns from the investments. Sixth Street fills a vital role in the credit system, supporting the small- and mid-sized businesses that are so important in the US economy.
Sixth Street targets companies that range in size from $50 million to $1 billion for its portfolio, and works with clients in a broad range of industries, including business services, software & tech, consumer & retail, manufacturing, healthcare, and energy. This BDC handles senior secured loans, mezzanine loans, and common equity, with the loans ranging from $15 million to $350 million.
In the second quarter of this year, the last reported, Sixth Street saw total investment income of $63.8 million, and an adjusted net investment income per share of 42 cents. The company finished the quarter with $27.2 million in cash and other liquid assets available, as well as $1.32 billion in total principal debt outstanding and $1.16 billion in undrawn funds available on a revolving credit facility.
The company expects to see higher earnings going forward, as a result of increased interest income secondary to the Fed’s recent rate hikes. As such, management bumped up the common share base dividend for Q3 by a penny, to 42 cents. The new dividend was paid out on September 15. With an annualized rate of $1.68, the increased dividend gives a forward yield of 9.75%. This is well above average and well above the current rate of inflation.
All of this makes TSLX a solid choice for dividend investors, according to JPMorgan analyst Melissa Wedel.
“TSLX has a substantial portfolio size, which enables it to close deals in the more profitable upper middle market as only a handful of BDC peers can compete in that space. TSLX has a fully ramped dividend that is more than fully covered by NII, making the dividend secure, in our opinion. We believe TSLX is well positioned to benefit from industry tailwinds as banks decrease their participation in the middle-market lending space,” Wedel opined.
Wedel follows her comments with an Overweight (i.e. Buy) rating on the stock, and her price target of $21 implies an upside, for the next year, of ~22%. (To watch Wedel’s track record, click here)
Some stocks generate controversy among the Street’s analysts – but not Sixth Street. The shares have 8 unanimously positive reviews on file, giving the stock its Strong Buy consensus rating. With a current share price of $17.22 and an average price target of $22, TSLX has an upside potential of ~28% for the next 12 months. (See TSLX stock forecast on TipRanks)
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched 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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