Do you love dividends? Of course you do — and rightly so!
Scholars who study the stock market’s historical performance estimate that over time, the payment (and reinvestment, and compounding) of dividends have contributed anywhere from 30% to 90% of the S&P 500’s total returns. Simply put, if you’re not investing in dividend stocks, you’re doing it wrong.
And if you do love dividends, there’s one sector in particular you should be focusing on: Real estate investment trusts, or REITs, pay out some of the most generous yields available to investors today, in many cases, several times more yield than the 2% average on the S&P 500.
Knowing this, and having just been presented with a new stock report from investment bank B. Riley FBR, we’ve taken a good close look at the REITs highlighted therein — and run them through our TipRanks Stock Screener tool to ensure that other analysts agree with B. Riley. Three of them make the grade, and here they are for your perusal.
Ellington Financial (EFC)
Starting at the top is Old Greenwich, Connecticut-based Ellington Financial. Ellington focuses its business on the acquisition of residential mortgage-backed securities (RMBS), which confer upon their holders the right to collect mortgage payments on residential mortgage loans, as well as the actual residential mortgage loans themselves, commercial MBS, and of course, commercial mortgage loans, too.
Ellington Financial has a good track record of putting “capital to work at wider spreads while protecting book value, which has resulted in strong economic returns and dividend stability,” says B. Riley’s analyst Tim Hayes. In his opinion, this REIT is “one of the best positioned companies … to take advantage of ebbs and flows in the MBS markets/potential volatility in 2020,” and in particular, to take advantage of the Fed’s recent uptick in buying mortgage-backed securities to inject money into the economy.
2020, says Hayes, “could be a very strong year for EFC, especially given the potential for significant volatility surrounding the November election, GSE reform, and Fed policy.” Indeed, Hayes posits earnings ahead of consensus this year ($1.87 per share), rising to $1.92 per share in 2021, and the analyst believes this warrants a higher price target of $19.50 on this buy-rated stock (5.5% above current pricing). Overall, Hayes says Ellington is one of this top two picks in this sector. (To watch Hayes’ track record, click here)
Other analysts are even more optimistic. Of the three investment banks that have rated Ellington over the past month, all three agree the stock is a “buy” — and on average, they think it’s worth $20 a share. 7% ahead of current pricing, that should combine with Ellington’s 9.2% dividend yield to product returns in excess of 16%. (See Ellington stock analysis at TipRanks)
New Residential Investment (NRZ)
Hayes’s second REIT of the day is New Residential Investment. A specialist in residential mortgage loans, this NYC-based mortgage REIT is both the biggest stock on today’s list by a large margin (market cap — $6.9 billion), and also the most generous dividend payer, with a shockingly large yield of 12.3%.
It’s also, alongside Ellington Financial, one of Hayes’s top two picks in the sector, with a target price of $18.50 per share and a profit potential of 12.5% (before added the dividend. After the dividend, you could be looking at close to a 25% profit).
Why is Hayes optimistic about this one? In the current low interest rate environment, says the analyst, with a strong economy and strong demand for housing, there’s likely to be significant demand for new and refinanced loans, creating new business for New Residential’s loan originating business, “New Rez.” Rising expenses and weaker “asset yields,” says the analyst, could weigh on earnings this year ($2.10 per share is his guess), but business could perk back up in 2021, and Hayes is forecasting profits per share of $2.14, justifying the analyst’s buy rating.
And Wall Street is broadly in agreement. Over the last couple of months, two other analysts have rated New Residential Investment Corp a buy, and only one a “hold.” Their consensus, by the way, that the stock is worth $18.20, isn’t that far off from Hayes’s own. (See New Residential stock analysis at TipRanks)
Jernigan Capital (JCAP)
Last but not least, Jernigan Capital is a Memphis, Tennessee-based small-cap REIT that focuses on providing debt and equity capital to self-storage facility businesses in over 100 U.S. markets. In fact, according to the company, it is the only REIT in America that focuses its business entirely upon the self-storage sector. Which is, incidentally, a great place to do business, given Americans’ affinity for collecting “stuff.”
In B. Riley’s report, analyst Tim Hayes predicts that 2020 will be “a breakout year for JCAP” featuring multiple acquisitions driving “stronger NOI growth and NAV creation.” For those not familiar with the terms, that refers to net operating income — or profits — and net asset value, which refers to the value of the assets the company controls.
Hayes is predicting a $26 target price for Jernigan stock by the end of this year, which is 38.5% above where the stock trades today.
Though, Hayes notes that his predictions of $1.22 per share in adjusted earnings per share in 2020, and $0.88 per share in 2021, are both below consensus estimates. Conceivably, if Jernigan earns more than Hayes predicts, the stock could be worth even more. Indeed, with a 7.1% dividend yield, it’s almost certain to deliver more in terms of total return.
Jernigan has slipped under most analysts’ radar; the stock’s Moderate Buy consensus is based on just two recent ratings. With shares trading at $18.90, the $23 average price target suggests room for a 22% upside. (See Jernigan stock analysis at TipRanks)