I'm Locking 7-10% Yields In This Upside-Down Market

seekingalpha07-05

The S&P 500 currently yields just 1.2%, a level that may not be suitable for most income investors.In this article, I present 2 higher yielding stocks that are either reasonably valued or undervalued....

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ISerg/iStock via Getty ImagesEarning a good income stream from investing in the broader market seems harder by the day, especially when the S&P 500 (SPY) continues to set fresh records. This has resulted in a precipitous drop in the dividend yield, which now stands at just 1.24%. As shown below, the yield on the S&P 500 now stands at its lowest level since 2021 and is hovering near the multi-decade low achieved during the tech bubble from the year 2000. S&P 500 Dividend Yield (YCharts)While one could argue that the impressive growth in SPY makes up for the low dividend yield, one has to wonder how sustainable those gains are, and whether if we’re in a bubble territory. As shown above, SPY’s yield grew in the years following 2000, and that was driven primarily by the drop in the index by as much as 47% from its peak. That’s why I remain heavily allocated toward income stocks that are far from being overvalued in today’s choppy market. This brings me to the following 2 stocks, which yield 7-10%, giving investors meaningful income and capital appreciation potential. Let’s explore why each makes sense for a diversified income portfolio! #1: Blackstone Secured Lending Blackstone Secured Lending (BXSL) is a BDC that's externally managed by renowned asset management firm, Blackstone (BX), which has over $1 Trillion in assets under management across credit, real estate, and infrastructure assets. I last covered BXSL in March, highlighting its strong dividend coverage and balance sheet with runway for growth. The stock has risen by 5% since then, with a 10% total return including dividends, outpacing the 8% rise in the S&P 500, as BXSL continues to demonstrate sound fundamentals with continued NAV per share growth. BXSL has put together a sizable portfolio with a $10.4 billion fair value that's spread across 210 companies. The portfolio is diversified across both defensive and growth industries, with no single company representing more than 3% of the portfolio total. As shown below, software, healthcare, professional services, and business services represent BXSL's top segments comprising 50% of the portfolio total. Investor PresentationBXSL benefits from a conservatively managed portfolio amidst economic uncertainty, with 98.5% of its loans being first-lien secured, and a low weighted average loan-to-value ratio of 48%. This helped BXSL to achieve a robust 13.1% annualized return on equity and NII per share of $0.87 during Q1 2024. This equates to a safe 113% dividend coverage ratio based on the current quarterly dividend rate of $0.77. The dividend rate was raised by 10% over the past 12 months and sits materially higher than the $0.53 quarterly rate at the time of BXSL's IPO in 2021. Notably, BXSL has grown its NAV/share for 6 consecutive months, including a $0.21 sequential QoQ improvement since the end of 2023 to $26.87 at present. As shown below, the NAV/share currently sits at an all-time high after more than recovering from lower mark-to-market valuations on the portfolio when interest rates started rising in 2022. YChartsBXSL also carries a very low non-accrual rate of just 0.1% as a percentage of portfolio cost. It's also well-positioned for opportunistic growth with $1.4 billion in total liquidity with no debt maturities until 2026, and a debt-to-equity ratio of 1.03x, sitting well below the 2.0x statutory limit for BDCs. This gives management capacity to pursue investments in the data center arena, which management noted as being a high conviction sector after BX's acquisition of QTS data centers in 2021. Admittedly, BXSL isn't cheap for an externally-managed BDC at the current price of $31.13 with a Price/NAV ratio of 1.16x. As shown below, this sits at a premium to peers Ares Capital (ARCC) and Blue Owl Capital Corp's (OBDC) 1.09x and 1.0x, respectively. BXSL vs Peers Price-to-NAV (YCharts)Trading at a premium to NAV is not a bad thing, however, as this opens up an accretive funding source for equity issuances. Moreover, BXSL could be a great addition to a diversified income basket considering its very high first-lien exposure combined with a stronger balance sheet and lower non-accrual rate compared to the peer average. With a dividend yield of 9.9%, investors are well-compensated for paying a premium to book value. #2: Imperial Brands Imperial Brands (OTCQX:IMBBY) is perhaps the least followed tobacco name compared to much bigger peers British American Tobacco (BTI), Altria (MO), and Philip Morris International (PM). I last covered IMBBY in July of 2021, highlighting its turnaround efforts to shore up its balance sheet and focus on core brands, along with deep undervaluation. It appears that my thesis has paid off, with the stock rising by 19% and giving a 48% total return including dividends, far surpassing the 26% rise in the S&P 500. IMBBY has continued to make solid progress in transitioning its portfolio towards NGPs (next generation products). This is reflected by both IMBBY's revenue and operating profit growing by 2.8% YoY during the six months ended on March 31, 2024. Moreover, adjusted EPS grew at a robust 7.7% YoY rate over the same time period as IMBBY continues to focus on driving profitability. This was driven by strong tobacco pricing growth of 8.6%, more than offsetting a decline in combustibles volume, and NGP revenue grew by an encouraging 17%. Notably, IMBBY is growing its market share in the U.S., Spain, and Australia, which represent three of its top 5 markets. Newer products like the disposable Blu vape bar with 1,000 puffs and the new Pulze 2.0 heated tobacco stick with flavors contributed to IMBBY's expansion in Europe. For the full-year 2024, management is guiding for conservative low-single digit revenue growth on an FX-neutral basis, on the back of strong tobacco pricing and the support of continued growth in next generation products. IMBBY carries a strong balance sheet with a BBB investment grade credit rating from S&P. It expects to achieve a net debt to EBITDA ratio of 2.0x by the end of this year, which puts it in line with the leverage targets of peers, BTI, MO, and PM. Importantly for income investors, IMBBY raised its interim dividend by 4%. The two interim dividends totaling 44.9 pence equates to a 37% payout ratio, and I would expect for the remaining 2 higher dividends to be covered by earnings as well. It's also worth noting that IMBBY has resumed share buybacks since 2023 with a 6% reduction in share count, as shown below. IMBBY Shares Outstanding (Seeking Alpha)IMBBY represents solid value at the current price of $26.19 with a forward PE of just 7.8, sitting well below its historical PE of 11.8, as shown below. FAST GraphsWhile IMBBY is pricier than the 6.8x PE of BTI, it's less expensive than the 9.0x and 16.1x PE ratios of MO and PM, respectively. Analysts estimate 6.2% EPS growth for IMBBY next year, which I believe is reasonable considering IMBBY's demonstrated pricing power, growth in NGP products, and share buybacks. With a 7.1% dividend yield and my long-term expectations for mid-single digit annual EPS growth, IMBBY could produce market-beating returns even without a reversion to its mean valuation. Investor Takeaway Blackstone Secured Lending and Imperial Brands both present compelling opportunities for income-focused investors in today's market, offering high dividend yields and strong fundamentals. BXSL benefits from a conservatively managed, diversified portfolio with robust dividend coverage, NAV/share growth, and a strong balance sheet, positioning it for growth and stable returns. IMBBY is successfully transitioning its portfolio towards next-generation products, while maintaining profitability and shareholder returns through strategic market expansion and prudent financial management. Together, these two stocks offer meaningful income and capital appreciation potential, making them potentially valuable additions to a diversified income portfolio.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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