The High Dividend Yield Vanguard ETF (NYSEARCA:VYM) has surged by more than 6% month-over-month, suggesting that dividend stocks are regaining traction.
Intuitively speaking, the resurgence does make sense as a pending interest rate pivot may initiate more confidence among dividend investors. I say this because stocks with high dividend payout ratios usually suffer during high interest rate environments. However, an implied rate pivot could compress risk premiums assigned to dividend stocks and simultaneously instill more confidence in companies’ boards to implement further dividend hikes.
With my baseline argument in mind, I decided to dial in on the dividend stock landscape and handpick three best-in-class dividend stocks. Moreover, I decided to factor in Wall Street ratings into my filter to add substance to the analysis.
Herewith are the three assets that I picked.
Coca-Cola (KO)
Coca-Cola (NYSE:KO) is a firm favorite at Jefferies’ (NYSE:JEF) quant team as the researchers believe KO stock’s return on invested capital ranks above its cost of capital. As such, communicating that KO stock’s residual value is superb, consequently allowing for sustainable dividend distributions.
Although it remains in a year-to-date drawdown, KO stock has surged by more than 5% in the past month, implying an inflection point has emerged. Such price action was inevitable as KO stock’s countercyclical attributes mean downward oscillations are usually temporary. Besides its price momentum, Coca-Cola’s dividend yield of 3.14% is supplemented by a dividend coverage ratio of 1.46 times, conveying its reliability as an income-generating asset.
Coca-Cola’s third-quarter earnings reminded everyone of its entrepreneurial zeal. For example, the firm’s organic revenue rose by 11%, adding to its five-year compound annual growth rate of 5.78%. Qualitatively, Coca-Cola’s core product sales remain robust. In addition, the company is expanding into new consumer bases, which is echoed via recent acquisitions like Fairlife, Topo Chico and MOJO Beverages.
Lastly, Coca-Cola is looking good from a valuation-based perspective. In fact, KO stock’s price-to-earnings ratio of 23.72 times is at a discount relative to its five-year average. Thus suggesting that KO stock’s dividend prospects are accompanied by price return potential.
Invitation Homes (INVH)
Oppenheimer (NYSE:OPY) upgraded Invitation Homes (NYSE:INVH) to outperform at the end of October. According to Oppenheimer’s Tyler Batory, Invitation Homes is set for higher rental growth and possesses numerous external growth opportunities.
Invitation Homes brands itself as the number one home leasing company in the United States. The firm’s leasing program has an 80% retention rate and is growing at scale. Therefore, I am confident that it can build on its 3.12% dividend yield in the coming years.
Let’s look at a few of Invitation Homes’ fundamental aspects.
Invitation Homes’ portfolio has an average income-to-rent ratio of 5.2 times, which is quite scintillating, to say the least. In addition, the company has $1.8 billion of liquidity on its balance sheet, resulting in a credit outlook upgrade from Moody’s earlier this year. Furthermore, Invitation Homes beat its third-quarter revenue estimates in October. The firm reported $617.7 million in quarterly revenue, displaying 8.6% year-on-year growth. Strong same-store income paired with 99% rental collections were strong driving forces, which will likely be sustained given its high-quality portfolio.
One could say that INVH stock’s valuation outlook is underwhelming. I mean, the stock has a price-to-funds from operations ratio of 19.02 times, which is on the high side. However, with a five-year compound annual growth rate of 7.93%, I think INVH is a secular opportunity. As such, its high multiples are probably justified.
East West Bancorp (EWBC)
East West Bancorp (NASDAQ:EWBC) has been subject to upgrades from Wedbush and UBS (NYSE:UBS) in recent months. The prior believes EWBC stock may benefit from robust capital adequacy levels, while the latter thinks the bank’s profitability ratios are best-in-class.
About 74% of East West Bancorp’s asset base spans loan activities. Most of the bank’s loans are cyclical, as its portfolio holds significant exposure to commercial real estate and commercial & industrial debt. Although such assets are risky, they generally provide robust returns if diversified. In addition, more than 85% of East West Bancorp’s liabilities are short-term deposits, naturally keeping its found costs low. I believe East West Bank’s low funding costs paired with high-return debt exposure will lead to sublime profitability in the next few years.
Furthermore, East West Bancorp recently released its third-quarter earnings. East West Bancorp’s third-quarter results revealed a revenue beat of $4.13 million and an earnings-per-share miss of one cent. Curtailing input costs paired with a potential interest rate pivot might soften the bank’s cost base in 2024, concurrently leading to earnings target beats. As such, I am incredibly optimistic about the bank’s year ahead. In fact, I think its price-to-book ratio of 1.31 times is unjustifiably high, and its 3.15% dividend yield will be improved upon in due course.
This is a strong buy here!
On the date of publication, Steve Booyens did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
