When it comes to forecasting the year ahead, it’s only natural to turn to the experts. No one has a crystal ball, to show what’s coming up, but the market’s most successful players – major league investors, corporate CEOs, financial gurus – have built their reputations by correctly interpreting the current signs, and following them to returns and profits. JPMorgan’s Jaime Dimon stands tall in this company.
Dimon heads the largest of the US banking firms; JPM controls $3.79 trillion in total assets, and has almost $4 trillion in total assets under management; the bank has connections with half of all households in the US. Leading an organization of such scale gives Dimon a clear view of the macro picture – and he sees 2022 gearing up for a boom.
Citing several factors, including the sound cash position of many consumers, increased consumer spending, and an improved household debt-to-service ratio, Dimon believes that consumers will drive improvements in the coming year. They’ll be helped along, in his view, by a Federal Reserve policy shift that will aggressively attack inflation. The JPM head foresees the Fed implementing four rate hikes – at least – in the coming months.
While Dimon sees good times ahead, he also acknowledges that several headwinds are possible. Inflation is still high; the Fed may not limit itself to four rate hikes. Both will weigh on investors’ minds, and maybe prompt a turn toward a defensive stance. In such an environment, it would make sense to move into dividend stocks, especially those which have shown long-term reliability of payments.
Summing up, Dimon’s comments lean toward a mix of caution and bullishness. He says, “We’re kind of expecting that the market will have a lot of volatility this year as rates go up and people kind of redo projections… If we’re lucky, the Fed can slow things down and we’ll have what they call a ‘soft landing’.”
With this in mind, we used TipRanks’ database to pull up the info on three dividend stocks that have gotten the thumbs-up from JPMorgan analysts. These are Buy-rated equities, with up to 9% dividend yields. Let’s take a closer look.
Spirit Realty Capital (SRC)
We’ll start with a real estate investment trust (REIT), a class of companies long known as reliable, high-yielding dividend payers. Spirit is a property owner in the commercial REIT sector, investing in and leasing out properties which are occupied by commercial tenants. Among the company’s largest tenants are some of the biggest names in American retail, including Walgreens, Dollar Tree, and Home Depot.
By the numbers, Spirit presents an impressive picture. As of the end of 3Q21, the last period reported, the company claimed some 1,915 properties with 312 tenants and a 99.7% occupancy rate. Spirit’s real estate investment was valued at $7.5 billion. The largest segment represented by the company’s tenants was service retail, at 43.7%; industrial tenants made up the second-largest unit, at 17.5%.
This foundation has been supporting some solid income numbers. Spirit reported net income of 32 cents per share in Q3, along with adjust funds from operations (AFFO) of 84 cents per share. In recently released Q4 preliminary numbers, Spirit is guiding toward a similar AFFO, of 84 to 85 cents per share. In addition, the company spent $463.9 million in Q4 to acquire another 92 properties, and an average remaining lease term of 15.2 years. The new properties are 59% retail and 40% industrial.
Turning to the dividend, Spirit has a 3-year history of reliable payments. The current dividend, declared in November for payment in January, was set at 63.8 cents per common share. This annualizes to $2.55 per common share, and gives a robust yield of 5.3%. This compares favorably to the average dividend yield on the broader markets; the typical S&P-listed dividend payer is currently yielding about 2%.
In the JPMorgan view, this stock is a growth story, fueled by smart investments. Analyst Anthony Paolone writes: “SRC released 4Q/2021 preliminary estimates and announced 2022 guidance, and it’s a good picture, in our view… Importantly, the company announced 2022 AFFO/share guidance of $3.52-3.58 ($3.55 midpoint), which is about 2% above Bloomberg consensus. Driving the forecast is expected capital deployment of $1.3-1.5 billion in 2022, which is meaningfully ahead of our $900 million going into this news.”
“SRC now trades at a 15-20% discount to net lease peers despite putting up strong deal volume and growth that’s toward the top of the pack. Net lease REITs may face some headwinds heading into 2022 due to fears of higher interest rates, and more organic growth is likely in other property types. Nonetheless, the stock remains compelling to us,” Paolone summed up.
In line with these comments, Paolone rates SRC an Overweight (i.e. Buy), and his $59 price target suggests a one-year upside of ~20%. Based on the current dividend yield and the expected price appreciation, the stock has ~25% potential total return profile. (To watch Paolone’s track record, click here)
Looking at the consensus breakdown, based on 4 Buys and Holds, each, SRC stock has a Moderate Buy consensus rating. The shares are selling for $48.99 and the $53.38 average price target implies an upside of 10% from that level. (See SRC stock forecast on TipRanks)
AGNC Investment (AGNC)
The next dividend stock we’re looking at is another REIT. Where Spirit, above, is involved in the commercial real estate market, AGNC focuses on mortgage-backed securities (MBSs), with a particular preference for those backed by the US Federal Government. AGNC’s investment portfolio is heavily weighted (89%) toward 30-year fixed rate mortgages, with another 6% of the total being fixed rate loans of less than 15 years. The investment portfolio totals $84.1 billion. Of that total, $53.7 billion is in the residential market.
AGNC will be releasing its 4Q21 results in February, but we can look back at the Q3 numbers to get an idea of where the company stands. As of the end of Q3, AGNC had an EPS of 75 cents; this was slightly lower than the 76 cents reported in Q2, and the 81 cents reported in 3Q20. The company has unencumbered cash at the end of Q3 totaling $5.2 billion.
Despite the slow fall-off in earnings, AGNC is still able to fund its dividend without dipping into its cash holdings. The company pays out the dividend on a monthly basis rather than quarterly; the current payment of 12 cents per month has been held steady for the last several years and gives a quarterly payment of 36 cents (40 cents below current quarterly earnings) and annualizes to $1.44 for a strong 9.2% yield.
We believe the company offers a strong risk/reward profile. We believe AGNC remains one of the best-managed MREITs within our coverage universe. In our view, being internally managed represents a long-term value driver. We believe AGNC’s portfolio of agency MBS represents “flight to quality” assets in a cyclical downturn and benefits directly from Fed support with improved valuations and tighter spreads. We note that increased interest rate volatility may trigger fluctuations in T/BV share.
Among the bulls is JPMorgan’s 5-star analyst Richard Shane who believes AGNC shares are trading at an attractive risk reward profile.
“We believe AGNC remains one of the best-managed MREITs within our coverage universe. In our view, being internally managed represents a long-term value driver. We believe AGNC’s portfolio of agency MBS represents “flight to quality” assets in a cyclical downturn and benefits directly from Fed support with improved valuations and tighter spreads. We note that increased interest rate volatility may trigger fluctuations in T/BV share,” Shane opined.
These comments support Shane’s Overweight (i.e. Buy) rating on the stock, His price target stands at $16.50, which implies a potential one-year 16% total return including dividends. (To watch Shane’s track record, click here)
Overall, AGNC stock has a Moderate Buy consensus rating based on 7 current reviews with a 3 to 4 split between Buys and Holds. The stock has an average price target of $17, predicting an upside of ~10% from the share price of $15.48. (See AGNC stock forecast on TipRanks)
Public Service Enterprise Group (PEG)
Next on our list is a public utility company, the Public Service Enterprise Group (PSEG). This New Jersey-based company serves customers in the greater New York City metropolitan area, including areas in New Jersey and Long Island, as well as southeastern Pennsylvania. The company provides both natural gas and electric power; power is generated in a network of traditional fossil fuel and nuclear power plants, although the company is making moves toward cleaner production. PSEG’s transmission lines are integrated into the larger regional network, connecting with power utilities in Pennsylvania, Delaware, and New York.
In recent months, PSEG has been moving toward a greener profile. In part, this is a recognition of the political realities involved in operating in heavily ‘blue’ areas. The company has committed to a ‘race to zero’ initiative, to reduce pollutant emissions, and in August agreed to sell off its 6,750 megawatt fossil fuel generating portfolio to ArcLight Capital in a deal worth over $1.9 billion. The sale is expected to be completed early this year. In a related move, PSEG has entered into several proposals to support New Jersey’s offshore wind power generation goals.
PSEG reported its last financial results, for Q3 of 2021, in November. At the top line, the company showed $1.9 billion in revenues, down 19% year-over-year. Looking at the first three quarters of 2021, PSEG showed a 9-month revenue total of $6.67 billion, compared to $7.2 billion the year before, for a narrower 7% slip. Earnings were positive, however, with the non-GAAP result at 98 cents per share, compared to 96 cents the year before. Looking forward, PSEG expects to see non-GAAP earnings between $3.55 and $3.70 per share. This represents a 10-cent increase, or 3%, at the midpoint.
These earnings are more than enough to support the company’s dividend, which was announced in November at 51 cents per common share. That payment was made on the last day of 2021, and marked the fourth payment in a row at that level. PSEG has a recent history of increasing the dividend payment in Q1; we’ll see what happens at the next declaration, which should be in February. The current dividend annualized to $2.04 for 2021, and gave a yield of 3.09%.
The JPMorgan view on this stock was laid out by analyst Jeremy Tonet, who sees the transition to cleaner energy as the big story. He writes: “With the PSEG fossil transaction close expected shortly, PEG’s revamped business mix now features a low risk T&D utility, ZEC supported nuclear fleet, and meaningful upside leverage to the approaching offshore wind buildout across the eastern seaboard. We see the fossil sale close as the first step to unlocking value; in the unlikely event any component needs remarketing due to regulatory items, a much stronger power market points to upside on an eventual price tag. Moreover, the potential for bi-partisan nuclear PTC passage could provide further upside, given PEG’s ~3.8GW nuclear fleet.”
To this end, Tonet rates PEG shares an Overweight (i.e. Buy), and set a $73 price target to indicate an upside potential of 11%. (To watch Tonet’s track record, click here)
J.P. Morgan’s objective aligns almost perfectly with the Street’s view, where the $72.38 average price target is virtually the same. Rating wise, the stock boasts a Strong Buy consensus rating, based on 7 Buys vs. 1 Hold. (See PSEG’s stock forecast on TipRanks)
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.