What to make of the situation in Eastern Europe? Russia has massed forces on the Ukrainian border, and recognized two adjacent Ukrainian provinces – both with ethnic Russian population majorities – as independent. The US has matched this bellicosity with saber rattling of its own, although the Biden Administration has made it clear that it will oppose Russian moves with economic sanctions rather than force. The result: a geopolitical mess that is threatening stability from Moscow to Washington and all points in between.
Wall Street giant Goldman Sachs has added some fuel to investor concerns, making public its stance on market fortunes should an open conflict – or harsh sanctions against Russia – take effect. In either of those cases, the firm sees the S&P 500 index losing another 6% in the immediate aftermath. Such a loss would come on top of the ~10% drop the index has already seen this year.
When markets and futures are uncertain, and volatility is high, the logical portfolio move is into high-yield dividend payers. These are the classic defensive plays, giving investors a dual path toward returns, from both the share appreciation and the dividend payments.
Bearing this in mind, we used the TipRanks’ database to zero-in on two stocks that are showing high dividend yields – on the order of 8% or more. Each stock also holds a Strong Buy consensus rating; let’s see what makes them so attractive to Wall Street’s analysts.
KKR Real Estate Finance Trust (KREF)
It’s no surprise to find a REIT on a list of dividend champs – these companies, which buy, own, lease, and manage a variety of real properties, have long been known for their high-yield dividends. KKR, which operates primarily in 9 states (New York, California, Texas, Massachusetts, Pennsylvania, Virginia, Colorado, Illinois, and Florida) has a real estate portfolio composed mostly (over 98%) of senior loans. The company’s property investments are mainly in multifamily dwellings and commercial office space, although there are also significant investments in life sciences properties and the hospitality sector.
Earlier this month, KKR reported its 4Q and full-year results for 2021. The company reported that its investment portfolio was valued at $6.8 billion as of the end of 2021, and that it had $6.7 billion in financing capacity. KKR has $41 billion worth of real estate assets under management, an average loan size of $131 million – and best of all, 100% of all loans are described as ‘performing.’ For the full year, the company had 58 cents per share in distributable earnings.
That last is a key point, since distributable earnings fund the dividend. On February 1, the company declared a common stock dividend of 40.625 cents. This annualizes to $1.625 per common share, for a yield of 8%.
Covering KREF for BTIG, analyst Tim Hayes writes: “KREF has $900M of loans either closed or in the process of closing (most of which are multifamily), which we expect to drive net growth in 1Q22 and put the portfolio in a position to benefit from higher rates by late 1Q22/early 2Q22. Credit performance remained strong in 4Q21, with 100% of the loan portfolio performing, and management provided positive updates on watchlist credits (one of which repaid in full subsequent to quarter-end). Shares currently offer an 8.1% yield — an attractive spread to other fixed-income securities, in our opinion, given the low-risk profile of KREF’s portfolio.”
Based on the above, Hayes gives KREF a Buy rating, and his $23.50 price target indicates confidence in 12% upside by the end of this year. Based on the current dividend yield and the expected price appreciation, the stock has ~20% potential total return profile. (To watch Hayes’ track record, click here)
The analyst consensus on KREF shares is a Strong Buy and it is unanimous, based on 3 positive reviews set in recent weeks. The stock is selling for $20.87, with an average price target of $23; this gives it a potential upside of ~10%. (See KREF stock analysis on TipRanks)
Ellington Financial (EFC)
And now we’ll turn to another REIT, Ellington Financial. This company takes a broad approach to the REIT field; instead of focusing on just one type of asset, it invests in multiple types of real properties and related securities. Ellington’s portfolio includes equity investments, mortgage-backed securities, and both commercial and residential mortgage loans.
Ellington reports its Q4 results on February 23, but it’s worth looking back briefly at the previous quarter to get a feel for the company’s performance. In 3Q21, EFC reported $47.7 million at the top line, up 18% year-over-year, and core EPS of 46 cents. While the Q3 EPS had fallen 5 cents from the previous quarter, it was still enough to fund the monthly dividend.
At 15 cents per common share, the dividend comes to 45 cents per quarter, and yields an impressive 10.4%. The company most recent dividend declaration, made on February 7, keeps the payment at the current level and will be paid out on March 25.
Analyst Trevor Cranston, writing from JMP Securities, describes Ellington as a near-perfect defensive stock, writing: “We believe that Ellington Financial has consistently demonstrated its ability to generate best-in-class risk-adjusted returns among the residential mortgage REIT group, which in our view is largely attributable to the company’s outstanding protection of book value that has allowed it to generate positive economic returns every year since its founding, including in turbulent years such as 2008 and 2020…”
“As a result of EFC’s consistent protection of its capital base, we view the company’s long-term risk-adjusted return prospects to be among the best in the mortgage REIT universe and believe the company continues to be a most attractive investment opportunity for long-term dividend-oriented investors,” Cranston added.
These comments support Cranston’s Outperform (i.e. Buy) rating, while his $20 price target indicates room for an upside of 16% this year. (To watch Cranston’s track record, click here)
Judging by the consensus breakdown, opinions are anything but mixed. With 3 Buys and no Holds or Sells assigned in the last three months, the word on the Street is that Ellington is a Strong Buy. At $19.50, the average price target implies ~14% upside potential from current levels. (See Ellington stock analysis on TipRanks)
To find good ideas for dividend 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.