Down But Not Out: Buy These Beaten Dividend Stocks Before They Soar
The market decline has put many investors in a loop so far in 2022. If there’s one upside to a bear market, it’s that companies that pay a dividend to their investors typically do so based on their ability to generate cash, not their share price. This means that when dividend-paying stocks fall, chances are they are simply offering their investors a much better return while waiting for an eventual rally in the stock price.
With that in mind, three experienced investors have each selected a beaten dividend stock that they believe has a decent chance of rebounding. They have chosen AT&T (T -1.11%), Dominos Pizza (DPZ -4.10%)and Broadmark real estate capital (BRMC -1.98%). Read on to find out why and decide for yourself if it’s worth waiting for a possible rally in stocks.
An efficient telephone base
Eric Volkman (AT&T): AT&T is having a bad summer. In mid-July, it released its second-quarter results, in which it cut its free cash flow (FCF) forecast. Since free cash flow is the source from which dividend payments flow, this was alarming to the many income investors who hold the stock. Or tenuous anyway, before the subsequent sale after the profits.
I think these people are overreacting, and I think AT&T’s price drop offers a great chance to grab this high-yield dividend stock at a discount. It now pays almost 6.2%, giving it the edge over its eternal rival Verizon Communications with its 5.8%.
AT&T and Verizon have always been favorites for dividend lovers because they are monster cash generators. After all, their customer base consists of millions of postpaid (i.e. contracted) customers who pay them regularly. It also gives the two companies wide leeway to borrow huge amounts of dosh from lenders willing to lend to large corporations with torrents of recurring income.
Since cash is always a concern for investors, especially those who own AT&T, it can be worrying when forecasts are reduced. I think, however, that the company’s chop (at around $14 billion for 2022, down from the previous forecast of $16 billion) might be overly conservative.
After all, the telecom giant continues to grow very healthily where it counts. In this recent earnings release, it revealed that its net postpaid customer additions totaled around 813,000 – the best second-quarter figure in more than 10 years.
Meanwhile, fiber broadband internet service saw around 316,000 “adds”, for a strong 28% year-over-year increase. This engine of growth propelled AT&T’s overall broadband revenue nearly 6% higher, and there’s plenty of room for more in this ever-bandwidth-hungry world. Additionally, the company is doing a good job paying off its mountain of debt, and its core mobile phone business should continue to grow as 5G technology spreads.
Growth is therefore at stake for AT&T, as is the continued distribution of this attractive high-yield dividend.
Domino’s Pizza has a track record of excellent profit growth
Parkev Tatevosian (Dominos Pizza): Domino’s Pizza has fallen on hard times since economic reopening gained momentum in 2021. The international pizza business flourished at the start of the pandemic when governments restricted in-person dining in restaurants. Sales growth more than doubled to 13.8% in 2020 from 5.4% in 2019. That said, now that people have more options on where they can eat when they choose not to not cook, Domino’s takes priority.
As a result, the stock is 30% off its peak. Yet Domino’s success didn’t start at the start of the pandemic. In fact, over the past decade, the company has grown its revenue at a compound annual rate of 10.2%. At the same time, it grew its earnings per share at a compound annual rate of 23%. These are impressive numbers for a company in the restaurant industry, which is not known for its explosive growth.
Those earnings were enough to boost Domino’s dividend almost fivefold, from $0.80 in 2013 to $3.76 in 2021. To be sure, Domino’s will come under pressure in the near term as consumers unleash pent-up demand for out-of-home dining experiences. However, investors can reasonably expect Domino’s to return to its long-term average revenue and earnings growth rates. Domino’s stock price could jump in response if or when that happens. Investors would be cautious to buy Domino shares before that happens.
A hard money lender with a remarkably clean balance sheet
Chuck Saletta (Broadmark Realty Capital): Over the past year or so, hard-money lender Broadmark Realty Capital has traded as high as $10.72 per share. Its recent price of $6.95 per share is a whopping 35% below that level, which certainly qualifies the company’s stock as a beat.
Despite this decline in share price, the company has diligently maintained its monthly dividend of $0.07 per share, giving it a current annualized yield of around 12%. That’s a pretty high yield, indicative of both the fact that the company is in the business of lending money and that it’s structured as a real estate investment trust (REIT). Due to this structure, it must pay out at least 90% of its profits in the form of dividends. This tenure pretty much ensures a pretty decent dividend as long as the company remains profitable.
As a hard money lender, Broadmark Realty Capital often issues harder-to-place loans like construction loans and bridge loans, especially those where the borrower needs fairly quick access to finance. ‘silver. It may seem risky as the economy teeters in recessionary territory, but the company prides itself on being principled with its lending standards.
For example, its weighted average loan-to-value ratio is around 60%. In other words, for every $60 it lends on average, the property securing that loan is typically worth around $100. This is a stronger capital position than the typical 80% loan-to-value ratio needed to get the best rates on a conventional mortgage. This means he has a very good chance of getting the money he lent back if he has to foreclose on a property because the borrower hasn’t repaid his debt.
While this isn’t a guarantee the company will weather a recession unscathed, it does provide a decent reason to believe it can survive a downturn and come out stronger on the other side. This operational discipline is supported by the company’s balance sheet, with a very modest debt ratio of less than 0.1. This adds to the company’s resilience in the face of an economic storm and gives hope that its shares could very well rebound once the overall economic future looks brighter.
Get paid for your patience
Whether you choose AT&T, Domino’s Pizza, or Broadmark Realty Capital, each of these stocks gives you a decent combination of current earnings, a reason to believe earnings can continue, and a potential path to a stock rally. There are few better ways to invest than to get paid while waiting for a market recovery. If you decide to invest in one of these companies, remember that you must be an owner before the ex-dividend date in order to receive the company’s next dividend.