Bank of America says: Buy these two high-yield dividend stocks – each offering yields at least 9%

By | March 28, 2024

There’s been a lot of talk lately about this year’s bull market, both in itself and in comparison to last year. But it has received somewhat less attention as part of a broader trend: a secular bull market that began in 2013 and has seen the S&P 500 reach recent all-time highs.

Long-term trends are generally good for the market, but what the average retail investor really wants is solid returns in the here and now. There are several routes to achieving this, and one of the surest is investing in high-yield dividend stocks. Dividend payments provide a regular income stream regardless of market conditions, while high yields offer the potential for solid investment returns.

Several stock sectors are known for their high dividends, but we will focus on a few business development companies here. These companies provide credit access to a wide range of small and medium-sized businesses, returning their investment profits to their own investors.

Bank of America analyst Derek Hewett is bullish on the BDC sector, writing: “Our more optimistic view is driven by stronger core earnings per share and relatively stable credit given the improving investment outlook… Base rates are expected to rise in the near term remain high, which support a more sustainable top line. And despite higher interest rates, we expect solid lending to continue as underlying borrower performance remains resilient.”

Hewett goes on to improve his stance on two of these stocks, BDCs with a dividend yield of at least 9%.

In fact, it’s not just Bank of America that favors these names. Using the TipRanks database, we found that both are also rated as ‘Strong Buys’ by analyst consensus. Let’s take a closer look at that.

Golub Capital BDC (GBDC)

The first stock we will look at is Golub Capital. This is a mid-cap BDC company that, like its peers, invests in small and medium-sized businesses and provides its customer base with a necessary combination of capital, credit and other financial services. The company’s target market is in the small business sector, which has contributed to the long-term growth of the U.S. economy, and relies on BDCs to provide necessary credit and capital services.

Golub focuses on a crucial aspect of its business: delivering attractive total returns for its investors. The company achieves this by building a high-quality customer base, with many repeat customers. As an experienced credit asset manager, Golub understands the importance of portfolio quality.

The company’s investment portfolio is significant. As of December 31, 2023, it consisted of investments in 357 companies with a fair value of $5.443 billion. The majority of the portfolio, 86%, consists of one-stop, first-lien loans. The remainder includes 8% of traditional first-lien senior loans, 5% of equity and 1% of junior loans. Golub’s investments cover a wide range of business sectors, with a preference for investments in software companies, which represent 27% of the portfolio. The next two largest segments are healthcare providers, accounting for 8% of the total, and specialty stores, with 6%.

This high-quality portfolio generated total investment income of $164.77 million in the last reported quarter, fiscal 1Q24. This figure exceeded forecast by $3.79 million, although remaining flat year-over-year. It supported net investment income of 50 cents per share on non-GAAP measures, beating estimates by 2 cents per share.

Golub’s net investment income per share was sufficient to fully cover both regular and special dividends, which were to be paid on March 28 and March 15, respectively. Calculated using only the regular dividend, of 39 cents per common share, the annualized payment of $1.56 yields a forward yield of 9.5%.

According to analyst Hewett, this is a stock that deserves more attention from investors. He writes: “We believe that GBDC’s value proposition is not fully reflected in current share prices due to (1) a leading credit reputation that Golub has developed in the mid-market, (2) attractive financing through securitizations and SBIC financing, and (3) unique scale to close larger deals as Golub manages private funds.”

To quantify his position, the Bank of America analyst upgraded GBDC stock from Neutral to Buy. Its $17 price target, combined with the dividend, gives the stock a total return potential of 13.5% for the coming year. (To view Hewett’s track record, click here)

Overall, this stock has four recent analyst reviews on file, with a 3-1 split in favor of Buy over Hold, for a Moderate Buy consensus rating. (To see GBDC stock forecast)

Blackstone secured credit fund (BXSL)

Bank of America’s next BDC pick is Blackstone Secured Lending Fund, a BDC that operates under the auspices of larger asset manager Blackstone. The BXSL operates in its own financial services business as a source of capital and credit for private companies in the US. BXSL has diversified its investments across a wide range of industries. Like Golub Capital, it favors software and healthcare. The former represents 17% of the company’s investment portfolio, while the latter makes up 11%.

Of Blackstone’s investments, 98.5% are senior secured first lien loans, and 94.75% are in the US. The company also has investments in Canada and Europe. In total, this BDC has active investments in 196 client companies, and the investments are worth $9.9 billion at fair value.

The company’s portfolio generates strong income and in its latest fiscal quarter, 4Q23, it reported total investment income of $304 million. These revenues rose a solid 21% year over year, coming in at $11.28 million better than expected. Ultimately, BXSL’s net investment income of 96 cents per share was 2 cents higher than forecast.

On the dividend front, we see that BXSL has announced a payment of 77 cents per common share, which is expected to be paid on April 26. This dividend is fully covered by the Company’s net investment income, and annualized rate, of $3.08 per common share. , gives yield-oriented investors a 10% forward return.

Taken together, this all caught Hewett’s attention, and in his note to Bank of America, the analyst explains why he believes this BDC is a good choice: “We believe BXSL is well positioned to gain market share due to (1) a proprietary origination platform, (2) late-cycle focused portfolio, (3) a favorable compensation structure ensures greater alignment between shareholders. Additionally, BXSL has demonstrated best-in-class creditworthiness since inception.”

The analyst then goes on to upgrade BXSL from Neutral to Buy, while setting a $32 price target that suggests a modest ~4% one-year gain. That potential stock appreciation, added to the dividend, equates to a possible one-year return of 14%.

Zooming out to the broader picture, we see that the six recent analyst ratings on this stock are split 5-1 in favor of Buy over Hold for a strong Buy consensus rating. (To see BXSL Stock Prediction)

To find good ideas for trading dividend stocks at attractive valuations, visit TipRanks’ Best Stocks to Buy, a 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 for informational purposes only. It is very important to do your own analysis before making an investment.

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