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Inflation at 6.5%: 2 ‘Strong Buy’ Dividend Stocks That Beat This Rate

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Stocks were up this week, ahead of today’s inflation data. The gains reflected investor optimism that inflation will continue to scale back – a sentiment that was backed up by the actual numbers.

The rate of price increases for December came in at a 0.1% decrease month-over-month, and at an increase of 6.5% annualized. These were exactly in-line with the forecasts, and mark a slowing down of inflation going forward.

The slower pace is good news. With this scale-back – inflation’s annualized increase is well down from its 40-year high of 9% registered in June 2022 – investors and economists see more reason to believe that the Federal Reserve will also slow down its move toward interest rate hikes. While Fed Chair Jerome Powell has already made it clear that the central bank will prioritize battling inflation, and will keep rates higher, longer, as needed, it’s hoped that the Fed will back off from the recent rapid pace of interest rate hikes. We’ll see for certain later this month – the Fed’s Open Market Committee, which sets the key funds rate, is scheduled to meet on Jan 31/Feb 1.

Whatever the Fed does, investors should look for defensive moves to protect themselves – and that’s going to draw us to dividend stocks – and especially the high-yield dividend stocks. We’ve used the TipRanks database to look up two dividend payers that offer yields that beat the current inflation rate. And even better, they both have a ‘Strong Buy’ consensus rating from the wider analyst community. Let’s take a closer look.

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Ladder Capital Corporation (LADR)

We’ll start with Ladder Capital, a real estate investment trust (REIT) focused on the commercial property market. The company’s asset portfolio is valued at approximately $5.9 billion, and is composed primarily of commercial real estate loans and flexible capital solutions. Ladder also owns and manages commercial properties, with a bent toward net lease commercial contracts. The company, which has been in business since 2008, describes it’s ‘core competency’ as underwriting commercial real estate credit.

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In the last quarter reported, for 3Q22, Ladder showed better-than expected results, with the pre-tax GAAP income coming in at $31.3 million, or 23 cents per diluted share. The company had a net interest income of $28.89 million, up more than $6 million from the previous quarter. At the same time, real estate operating income slipped about $1 million q/q, to $27.68 million – an indication of the general economic situation pushing up the cost of business.

Of particular interest to dividend investors, however, Ladder’s distributable earnings – which directly support the dividend payment – were reported in Q3 at $34.3 million, or 27 cents per share. This was actually down quarter-over-quarter; the Q2 distributable EPS had been reported at 34 cents – although it was almost double the 3Q21 result of 14 cents per share.

In mid-December, Ladder declared its next dividend payment, to paid out on January 17. The common share dividend is set at 23 cents per share, fully covered by the distributable EPS. At this rate, the dividend annualizes to 92 cents per common share and gives a yield of 8.55%. This yield is more than 4x the average found among S&P-listed companies – and beats inflation by nearly 2 points, ensuring a real rate of return for investors.

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Keeping tabs on LADR for JMP Securities, analyst Steven DeLaney takes a bullish view of the stock. He believes the company is well positioned to survive whatever difficulties the economy has in store – and to bring solid results for investors.

“Ladder started lending more aggressively in 2Q21 when market conditions became attractive following the initial COVID disruption in early 2020, but the company is now slowing lending once again as the economic picture has deteriorated. The company has increased liquidity and it should be in a position to take advantage of any market opportunities that could emerge in the first half of 2023 as the Fed finishes its current tightening cycle,” DeLaney noted.

“We believe LADR shares offer an attractive investment opportunity over the next 12 to 24 months as the company executes on its primary goals of core transitional loan portfolio growth and harvesting of gains on seasoned net lease real estate assets, which should result in improving distributable earnings through 2023,” the analyst summed up.

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Tracking forward from this bullish stance, DeLaney gives the stock an Outperform (i.e. Buy) rating, with a $12.50 price target to suggest a one-year upside potential of 15%. Based on the current dividend yield and the expected price appreciation, the stock has ~24% potential total return profile. (To watch DeLaney’s track record, click here)

Overall, Ladder has picked up 4 recent reviews from the Street’s analysts, and these reviews include 3 Buys and 1 Hold (i.e. Neutral) – for a Strong Buy consensus rating. The stock is selling for $10.86 and its $12.63 average price target implies a 16% gain on the one-year time horizon. (See LADR stock forecast)

Rithm Capital (RITM)

Next up is Rithm Capital, another real estate investment trust. Rithm underwent a restructuring in the summer of 2021, and now operates as an internally-managed REIT. The company works at both the mortgage lending and the mortgage services ends of the business, and its portfolio includes loan originations, real estate securities, and both residential and commercial property mortgage loans. The company is also invested in MSRs, which make up about 26% of the portfolio.

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Rithm’s total portfolio currently stands at $7.53 billion in net equity, and the company manages $35 billion in assets. In its last reported financial results, for 3Q22, Rithm reported more than $153 million in earnings available for distribution, for 32 cents per common share. This figure – which backs up the dividend payments – was up ~5% y/y, from $145.8 million, and easily covered the $118.4 million in common share dividends paid out in Q3. The next dividend, of 25 cents per common share, was declared at the end of December for a January 27 payout. The payment annualizes to $1, and yields 11.3%, over 5x the average on the broad markets – and almost 5 points above the official readout for December’s annualized rate of inflation.

All of this brought Rithm to the attention of B. Riley analyst Matt Howlett, who says of the company: “Although the current macro backdrop presents challenges, RITM has cut costs, established interest rate hedges, and de-risked the balance sheet. We are confident in CEO Nierenberg’s ability to protect the company during a downturn while positioning it to take advantage of new opportunities. With RITM trading at 0.74x reported book value, we believe the current valuation represents an attractive entry point. We also expect dividend coverage through our modeling horizon (2024).”

To this end, Howlett gives RITM a Buy rating to go along with this bullish outlook, and quantifies it with a $12 price target to indicate potential for 36% upside in the year head. (To watch Howlett’s track record, click here)

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Overall, 7 Wall Street analysts have weighed in on RITM stock lately and their reviews are unanimously positive, backing up the stock’s Strong Buy consensus rating. RITM has an average price target of $11.71, suggesting a ~33% one-year gain from the current trading price of $8.82. (See RITM stock forecast)

To find good ideas for stocks trading 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 intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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