The new week kicked off on a negative note, as all 3 major indexes pulled back from record highs. The uncertainty about the COVID-19 Omicron variant cast a pall over investors already cautious about the impact of rising inflation.

But according to RBC chief US equity strategist Lori Calvasina, investors shouldn’t get too worked up. In fact, Calvasina takes a guardedly optimistic view of 2022. At the bottom line, Calvasina writes, “We continue to expect 2022 to be a year of solid but more moderate returns in the S&P 500 than what we’ve experienced in 2021.”

But how she gets there commands some interest. Calvasina notes, “Most of our economic tests suggest that the S&P 500 should end up north of 5,100 – a reminder that the strong economy that empowers the Fed to move should ultimately win out.” That would suggest a 12% gain on the S&P index; while significantly lower than this year’s 21% gain, it’s definitely enough to keep investors in the black.

With that outlook in mind, RBC has tapped two high-yield dividend stocks (yielding 9% or better) as Buying propositions going into 2022. While these are usually defensive portfolio positions, dividend stocks do have the advantage of ensuring an income stream no matter what the market conditions. Let’s take a closer look.

Annaly Capital Management (NLY)

The first of RBC’s picks that we’ll check out is Annaly Capital, a real estate investment trust (REIT). This is a logical place to look for high-yield dividends, as REITs have a history of offering outsized dividends; Annaly is simply typical in that respect. In other respects, however, it is not so common. The company is mortgage REIT, meaning its portfolio is composed of mortgages and mortgage-backed securities, rather than direct ownership of real estate.

The company is one of the largest mortgage REITs in the business. Annaly boasts a market cap of $11.2 billion and has $94 billion in total assets, which include $14 billion in permanent capital and $9.8 billion in unencumbered assets. The company’s investment portfolio is split, 70% in long-term fixed-rate agency investment and 30% in shorter-term credit.

Looking at Annaly’s recent performance, we see that in Q3, ‘earnings available for distribution’ (EAD) came in at 28 cents per share. This was down 2 cents from the prior quarter, and down 4 cents from the year-ago quarter – but it was more than enough to cover the 22-cent common share dividend payout.

The dividend payment declared on December 9 for Q4, with payment set for January 31. At that rate, the dividend annualizes to 88 cents and gives an impressive dividend yield of 11%. This should be enough to attract investors, as divided yields across the broader markets are currently averaging just 1.3%.

Markets are looking at changes in the near future, of the type that are likely to impact a mortgage REIT like Annaly. Specifically, the Federal Reserve is going to pull back its easy money policies (start the so-called taper), and likely raise rates in the bargain.

Getting ready for those shifts, RBC’s Kenneth Lee believes that Annaly is well-prepared. He writes of the company: “NLY continues to increase capital allocation towards credit assets, ahead of a Fed taper, and gradually build up its MSR portfolio, which could be a benefit in a rising rate environment. Management continues to take a conservative posture, with the ability to take advantage of any investment opportunities in the n-t. We continue to favor NLY’s diversified operating model and ability to pivot between attractive opportunities.”

In line with his optimistic take, Lee rates NLY an Outperform (i.e. Buy). Lee’s $9.50 price target conveys his confidence in NLY’s ability to climb 23% higher by the end of 2022. Based on the current dividend yield and the expected price appreciation, the stock has ~34% potential total return profile. (To watch Lee’s track record, click here)

Overall, the analyst consensus here is a Moderate Buy, based on 8 reviews that include 3 Buys and 5 Holds. The stock’s average price target of $8.86 suggests ~15% upside from the current share price of $7.72. (See NLY stock analysis on TipRanks)

Chimera Investment Corporation (CIM)

The second dividend stock, to round out our look at RBC’s picks, is another REIT, Chimera investment. Like Annaly, Chimera is a mortgage REIT, with a portfolio of mortgages and mortgage-backed securities. Chimera’s investments are mainly in residential mortgage loans, residential mortgage-backed securities, and asset securitization. The company currently manages over $16 billion in assets.

Over the past four quarters, Chimera has seen revenues stabilize between $220 million and $280 million, after higher volatility during the corona crisis of the previous four quarters. The most recent financial report, for 3Q21, showed $220 million at the top line. EPS was positive, and while it was down from Q2, the 42 cents reported as ‘earnings available for distribution’ beat the forecast by 6 cents, or 16%, and was up 27% year-over-year.

The earnings beat wasn’t the only good news. With 42 cents per share available, the company was easily able to afford the 33-cent per common share dividend payment. The dividend yields 9%, based on its $1.32 annualized payment. The company has a reliable dividend payment history going back to 2007.

Once again, RBC’s Kenneth Lee is bullish, writing: “Favorable loan pricing drove meaningful book value accretion in the quarter. Mgmt continues to believe seasoned RPLs [reperforming loans] represent an attractive investment opportunity. Strong housing market fundamentals remain supportive of favorable mortgage credit performance.”

Lee’s comments support his Outperform (i.e. Buy) rating, and he gives the stock an $18 price target that indicates room for a 12-month upside of ~26%.

There are only 2 recent reviews of this stock; Lee’s on the bullish side, and another on the Hold side. This gives CIM a Moderate Buy rating. With the stock’s price listing at $14.34, the average price target of $18 – matching Lee’s – suggests a one-year upside potential of ~26%. (See CIM stock forecast at TipRanks)

To find good ideas for dividend stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched 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.

Source: finance.yahoo.com