Amid the rising spread of coronavirus infections, staggered restrictions, higher jobless claims, historically low-interest rates, and shrinking economic activity, many investors are shifting some of their investments to dividend-paying stocks to hedge their portfolio against a market crash. So, investing in dividend stocks that also have the potential to move higher can be a great way to grow portfolio returns, while enjoying recurring cash flow.
However, given these uncertainties, investing in high-dividend yielding stocks could be tricky as they might have depressed prices leading to a trap. Therefore, it is important to ensure the sustainability of a company’s dividend payment based on strong fundamentals and cash flows, before betting on it.
Johnson & Johnson (JNJ), Annaly Capital Management Inc (NLY), AGNC Investment Corp. (AGNC) and Triton International Limited (TRTN) not only hold immense price appreciation potential but could also be a steady source of income because of their exceptional dividend yields.
Johnson & Johnson (JNJ)
JNJ researches, develops, manufactures, and sells various products in the healthcare field worldwide and is known for its consumer products such as baby care, women’s health, and wound-care. The company has operations in the pharmaceutical, consumer, and healthcare devices segments. JNJ is working on a potential COVID-19 vaccine and has recently initiated the second global phase 3 clinical trial of its Janssen vaccine candidate.
While the four-year average dividend yield for JNJ is 2.66%, the current annual dividend of $4.04 translates into a 2.81% yield. The company has uniformly increased its dividend payout for 58 years now. Over the past five years, dividend payouts for JNJ grew at a CAGR of 6.32%. The company has already declared a cash dividend of $1.01 per share for the fourth quarter. JNJ generated $7.65 billion in free cash flow in the third quarter, and returned $2.66 billion back to its shareholders in the form of dividends.
In the third quarter, JNJ reported a top-line of $21.1 billion, increasing 1.7% year-over-year to $980 million. The consumer products and pharmaceutical segments saw a recovery in revenue, but the medical devices segment declined 3.6%. Moreover, worldwide sales improved 1.7% year-over-year. EPS for the quarter came in at $1.33, surging 101.5% compared to the year-ago quarter. Driven by the robust momentum of its drugs, analysts expect EPS to grow 12.4% next year.
The company has a robust drug pipeline with more than 14 new drugs expected to launch by the end of 2023. It has recently submitted applications to the FDA and European Medicines Agency (EMA) seeking approval for Darzalex Faspro for patients with relapsed or refractory multiple myeloma. JNJ also submitted Paliperidone Palmitate 6-month supplemental new drug application to the FDA earlier this month for treatment of schizophrenia in adults.
How does JNJ stack up for the POWR Ratings?
A for Trade Grade
A for Buy & Hold Grade
A for Peer Grade
B for Industry Rank
A for Overall POWR Rating.
It is ranked #1 out of 240 stocks in the Medical – Pharmaceuticals industry.
Annaly Capital Management Inc (NLY)
NLY is a leading diversified capital manager that invests in and finances residential and commercial assets. The company operates as a real estate investment trust (REIT) and has more than $130 billion in total assets. NLY invests in various types of agency mortgage-backed securities, non-agency residential mortgage assets, and residential mortgage loans.
NLY has been uniformly paying dividends every quarter for the past couple of decades. The company has a four-year average dividend yield of 12.80%. In the third quarter that ended September 2020, NLY generated core earnings of $0.32 per share, growing 18.5% sequentially. Consequently, the company declared a dividend of $0.22 per share, translating into a 10.78% yield.
NLY reported a net interest income of $447.3 million in the last reported quarter, rising 12.2% sequentially. Capital allocation to the Agency increased to 80% of dedicated equity capital, which was largely driven by residential credit securitizations. Economic return for the quarter came in at 6.3%, as economic leverage of 6.2x came down from 6.4x in the prior quarter. However, total loan loss reserves declined by $22 million largely driven by a stronger economic forecast.
NLY completed two residential whole loan securitizations totaling $1 billion in the previous quarter, bringing aggregate issuances to over $5.0 billion since the beginning of 2018. The company now has a total of $8.8 billion of unencumbered assets, and unencumbered Agency MBS of $6.9 billion. GAAP net income surged 20.7% sequentially to $0.70 per share. Moreover, analysts expect current quarter EPS to rise 8% year-over-year.
NLY’s POWR Ratings also reflect a promising outlook. It has an overall rating of “Buy” with an “A” for Trade Grade, and a “B” for Buy & Hold Grade and Peer Grade. Among 31 stocks in the REITs – Mortgage industry, it’s ranked #4.
AGNC Investment Corp. (AGNC)
AGNC also operates as a REIT in the United States. The company invests in residential mortgage pass-through securities and collateralized mortgage obligations for which the principal and interest payments are guaranteed by government-sponsored enterprise or by the United States government agency. It funds its investments primarily through borrowings structured as repurchase agreements.
AGNC has been uniformly paying a monthly dividend since 2015. Since its May 2008 initial public offering through the third quarter of 2020, the company has declared a total of $10.3 billion in common stock dividends. While the four-year average dividend yield for AGNC is 12.47%, the current annual dividend of $1.44 translates into a 9.20% yield. The company has already declared a dividend of $0.12 per share, for the month of November 2020.
AGNC’s investment portfolio reached $7.6 billion in the third quarter. Net interest income climbed 153.8% year-over-year to $302 billion. AGNC reported 8.8% as economic return on tangible common equity for the quarter on an average leverage of 8.9x. GAAP net income came in at $1.15 per share compared to the year-ago loss of $0.03 per share. Stable interest rates and the Fed’s ongoing purchases are supportive of Agency MBS performance during the year. Hence, analysts estimate current year EPS to rise 19.9% year-over-year.
During the third quarter, AGCN repurchased 11 million shares, or $154 million, of its common stock for an average price of $13.95 per share. In October, the company terminated its existing stock repurchase plan that was due to expire on December 31, 2020 and replaced it with a new plan to repurchase up to $1 billion of common stock through December 31, 2021.
AGCN’s strong momentum is reflected in its POWR Ratings. It has a “Buy” rating with an “A” in Trade Grade, and a “B” in Buy & Hold Grade and Peer Grade. Within the REITs – Mortgage industry, it’s ranked #5 out of 35 stocks.
Triton International Limited (TRTN)
TRTN engages in the acquisition, leasing, re-leasing, and sale of various types of intermodal containers and chassis to shipping lines, freight forwarding companies and manufacturers. It operates in two segments – Equipment Leasing and Equipment Trading.
TRTN pays an annual dividend of $2.13, which translates into a dividend yield of 4.68%. However, the company has a four-year average dividend yield of 5.09%. TRTN raised its dividend payout to $0.57 in the third quarter from the fixed quarterly amount of $0.52 that it had been paying since 2018. Free cash flow for the quarter came in $114 million, while cash generated from operations grew 6.3% year-over-year to $219 million. Moreover, the company returned $35.85 million back to its shareholders during the quarter in the form of dividend.
TRTN’s third-quarter results did not fail to impress the Street. It reported total leasing revenue of $328 million as the equipment fleet utilization averaged to 97.6%. The resiliency of the utilization reflects a high-quality long-term lease portfolio. Moreover, the company’s container demand and trade volumes witnessed an exponential rise during the quarter. Adjusted EPS for the quarter came in at $1.14, rising 32.6% sequentially. Hence, in line with the large decrease in bunker fuel prices, EPS is expected to grow 34.5% next year.
TRTN recently announced pricing of a follow-on public offering of 10.7 million common shares worth $409.5 million. However, the company repurchased 0.4 million common shares in the previous quarter to bring back more than 12.5 million shares under the share-buyback plan cleared in August 2018.
It’s no surprise that TRTN is rated a “Strong Buy” in our POWR Ratings system. It also has an “A” for Trade Grade, Buy & Hold Grade, and Peer Grade. Among the 46 stocks in the Shipping industry, it’s ranked #1.
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JNJ shares were trading at $143.79 per share on Friday afternoon, up $0.11 (+0.08%). Year-to-date, JNJ has gained 1.25%, versus a 14.35% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...
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