We recently compiled a list of the 10 Very High Yield Dividend Stocks With Upside Potential. In this article, we are going to take a look at where Nordic American Tankers Limited (NYSE:NAT) stands against the other stocks with over 8% dividend yield.
High yields have always sparked debate between analysts and investors. Analysts typically advise caution with extremely high yields, while investors often find them attractive. Analysts’ concerns are valid; high yields can sometimes be warning signs of financial instability within a company. Many companies offering exceptionally high yields have been on the brink of cutting or suspending their dividends. That said, no company is completely out of the woods regarding its challenges, and dividend yield plays a minor role in a company’s financial difficulties. In fact, many reports have highlighted that high-yield stocks have performed well over the years.
Newton Investment Management published a report revealing that high-yield dividend stocks outperformed the broader market during high inflationary periods from 1940 to 2021. The report also showed that investment portfolios with high-yield dividend stocks outperformed those with low or no dividend stocks in terms of value-weighted performance. High-yield portfolios outpaced low-yield ones by 199 basis points and zero-yield portfolios by 330 basis points. This outcome is informative, yet it does not provide insights into the market conditions of that time, offering only a general overview of high-yield stock performance. Analysts have been particularly attentive to how dividend stocks perform during periods of market volatility, recognizing that the demand for regular income is most keenly felt during these times. Therefore, analysts recommend considering stocks with high yields only if these companies also demonstrate strong dividend growth streaks.
The S&P High Yield Dividend Aristocrat Index seeks to track the performance of companies with at least 20 consecutive years of dividend growth with an average dividend yield of 3%. According to a report by S&P Dow Jones Indices, in a backdrop of slowing growth but rising inflation, the index achieved a monthly average total return of 0.39% from 1999 through April 2024, surpassing the benchmark by approximately 120 basis points. Historically, inflationary environments have typically benefited short-duration stocks like Dividend Aristocrat companies. During slow growth phases with declining inflation, the performance of the High Yield Dividend Aristocrats has aligned closely with the benchmark. The report further mentioned that the dividend growth rate for the index also surpassed inflation over the long term.
As mentioned above, when investing in dividend stocks, high yield and dividend growth must go hand in hand, as many companies have shown that it is indeed possible. Analysts typically view yields between 3% to 7% as healthy. The health of dividend stocks is often assessed based on their ability to generate cash flow and their track record of dividend growth. Investors favor stocks that not only offer high yields but also maintain or steadily increase their dividend payouts, rather than frequently cutting them. Examples include some of the best dividend stocks such as Altria Group, Inc., Verizon Communications Inc., and British American Tobacco p.l.c. that have above-average dividend yields coupled with robust dividend growth histories. To read more about strong dividend payers, have a look at Best Blue Chip Dividend Stocks To Buy.
Our Methodology:
For this list, we screened for dividend stocks with yields higher than 8% as of July 8. Then, we narrowed down the choices by finding stocks with an upside potential according to analyst predictions. Finally, we selected companies with the most hedge fund investors holding stakes in them, using Insider Monkey’s Q1 2024 database. The stocks are ranked in ascending order of hedge fund investors having stakes in them. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A top-down view of a crane loading or unloading oil barrels from a Suezmax crude oil tanker.
Nordic American Tankers Limited (NYSE:NAT)
Number of Hedge Fund Holders: 18
Dividend Yield as of July 8: 11.36%
Nordic American Tankers Limited (NYSE:NAT) is a Bermuda-based international tanker company that owns and operates Suezmax tankers. Since the start of 2024, the stock has declined by over 12% because of the escalated geopolitical tensions across the Red Sea. The company boasts one of the largest fleets of Suezmax tankers, which are reportedly in high demand due to the ongoing disruptions. Its business model positions it for long-term benefits. The company is expected to gain from the historically low supply of Suezmax tankers over the next two to three years. Environmental regulations, rising steel and production costs, and higher interest rates make investing in new ships difficult. According to the company’s recent earnings report, only six new vessels are expected to join the global Suezmax fleet in 2024. In addition, the rise in US exports and Chinese imports is boosting demand for transportation services.
Despite having a strong business model, Nordic American Tankers Limited (NYSE:NAT) is not immune to ongoing global challenges. Fluctuating oil prices, geopolitical tensions, and high operating costs, which are around $9,000 per ship daily, could weigh heavily on the company. That said, it remains confident in the strong demand for its vessels. The supply-demand dynamics in the market for the company’s fleet are currently favorable, supporting this positive outlook. Additionally, the company maintains one of the lowest debt levels among publicly traded tanker companies. As of March 31, 2024, the company’s net debt—which is calculated by subtracting current assets from total liabilities—was $228 million. With a fleet of 20 vessels, this translates to $11.4 million of debt per ship. It also has a lower debt-to-equity ratio of 0.5. Wall Street analysts have a Moderate Buy rating on the stock with a $5.40 price target, reflecting a 43.2% upside potential.
Nordic American Tankers Limited (NYSE:NAT) pays special attention to strategic timing and financing of expansions, which are crucial factors for ensuring both financial stability and commitment to dividend payments. The company has been paying regular dividend payments for 107 consecutive quarters, which makes NAT one of the best dividend stocks on our list. It currently offers a quarterly dividend of $0.12 per share and has a dividend yield of 11.36%, as of July 8. The company expects to increase its payouts in improved market conditions. Its cash position is also strong, generating over $37.5 million in operating cash flow in the first quarter of 2024.
Nordic American Tankers Limited (NYSE:NAT) was a part of 18 hedge fund portfolios at the end of Q1 2024, up from 16 in the previous quarter, as per Insider Monkey’s database. The stakes held by these hedge funds have a collective value of over $20.2 million. Among these funds, Two Sigma Advisors owned the largest position in the company.
Overall NAT ranks 8th on our list of the best high yield dividend stocks with upside potential. You can visit 10 Very High Yield Dividend Stocks With Upside Potential to see the other high yield dividend stocks that are on hedge funds’ radar. While we acknowledge the potential of NAT as an investment, our conviction lies in the belief that some deeply undervalued dividend stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued dividend stock that is more promising than NAT but that trades at less than 7 times its earnings and yields nearly 10%, check out our report about the dirt cheap dividend stock.
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Disclosure: None. This article is originally published at Insider Monkey.