3 high-yielding dividend stocks with up to 132% upside, according to Wall Street

If history is any guide, one of the smartest ways to make money on Wall Street is to buy dividend-paying stocks.

In 2013, JP Morgan Asset Management, a division of the banking giant JPMorgan Chase, published a report examining the average annual return of dividend stocks for non-dividend payers over a period of four decades (1972-2012). The comparison showed income stocks hovering around non-dividend stocks, with an average annual return of 9.5% versus 1.6% over 40 years.

But not all dividend stocks are created equal. After a massive sell-off in stocks since the start of the year, some Wall Street analysts believe the following three high-yielding dividend-paying stocks are poised for a big upside. Based on analysts’ lofty price targets, these passive income powerhouses offer upside potential ranging from 66% to 132% over the next 12 months.

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Citigroup: implied rise of 66%, return of 4.23%

The first high-yield stock with serious upside potential is one of the largest US banks by assets, Citigroup (VS 2.85%). According to Wells Fargo analyst Mike Mayo says Citigroup can hit $80, which would be a nice 66% upside from the stock’s April close.

Mayo’s optimism about Citigroup is primarily based on the work done by Jane Fraser since taking over as CEO in March 2021. Mayo is a big fan of Fraser’s capital allocation strategy, which is to sell some international assets and redeploy money to higher growth initiatives. Interestingly, Mayo is also a critic of Citigroup’s board, which he says should mostly be replaced after years of share price underperformance.

There are two issues that have long haunted Citigroup and its shareholders. First, regulatory oversight of the company has been lacking. While Bank of America well past its fines and settlement phase related to the financial crisis, Citigroup continues to struggle with litigation and settlements. It effectively turned into a “show me” action, with investors waiting for Fraser to show them that Citi can outrun its previous troubles.

The second problem has been Citigroup’s exposure overseas. In the 2000s, having international exposure was seen as a good thing for big banks. But with Europe facing a debt and growth crisis, and Asia having become a supply chain disaster due to COVID-19, Citi’s international exposure has been a crutch.

If there’s a silver lining here, it’s that interest rates are set to rise in the United States. Bank stocks typically see their net interest income increase on outstanding floating rate loans when the Federal Reserve raises its target federal funds rate. The magnitude of these increases should help offset the weakness in non-interest income.

Citigroup is also quite inexpensive, relative to its book value. Shares can currently be picked up for a 48% discount to reserve. For extremely patient investors, Citigroup could be a bargain. However, a stock price of $80 within 12 months is probably not in the cards.

Close up of a flowering cannabis plant in an indoor commercial grow farm.

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Innovative Industrial Properties: Implied 101% upside, 4.84% return

Another high-yielding dividend stock with meteoric upside potential is the cannabis-focused real estate investment trust. Innovative industrial properties (IIPR 0.06%). BTIG analyst Thomas Catherwood estimates IIP, as the company is more commonly known, can reach $290 per share. That would represent up to 101% upside from the stock’s close last week.

In particular, Catherwood has previously highlighted IIP’s ability to “identify talent” in its tenants. By this, Catherwood is referring to IIP’s success in leasing its cultivation and processing facilities to established operators in several states that are very likely to thrive and continue to pay rent for a long time. Additionally, Catherwood believes that increased competition and improved availability of capital will not impact IIP’s operating model.

The interesting thing about Innovative Industrial Properties is that it could be the only marijuana stock that opposes federal legalization and cannabis banking reforms. As long as weed remains a federally illicit substance, IIP can benefit from its sale-leaseback agreements. Since access to traditional banking solutions can be hit and miss, IIP acquired facilities in cash and immediately leased these assets to the seller. These arrangements provide money to pot companies and allow IIP to land long-term tenants.

Investors can also appreciate the cash flow predictability of Innovative Industrial Properties’ operating model. At the end of April, IIP owned 109 properties covering 8.1 million square feet of rental space in 19 states. Earlier this year, the company reported that all of its properties were leased, with a weighted average lease term of more than 16 years.

As a bonus, IIP passes inflationary rent increases on to its tenants each year and collects a 1.5% property management fee tied to each property’s base annual rental rate. In other words, there is a modest organic growth component that can help boost its operating profit.

Over the past five years, IIP’s quarterly dividend has increased by 1,067%. With a company valued at just 20 times Wall Street’s year-ahead earnings forecast and an estimated growth of 37% in 2022 and 24% in 2023, a price target of $290 is perfectly reasonable. Maybe not in the next 12 months, but in the not too distant future.

A person closely examining a sweatshirt from a clothes rack in a clothing store.

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American Eagle Outfitters: implied upside of 132%, return of 4.77%

However, the creme de la creme of upside opportunities among high-yielding dividend stocks, at least on this list, is the specialty retailer American Eagle Outfitters (AEO -2.17%). According to analyst Corey Tarlowe of Jefferies Financial Group, American Eagle is a “buy” worth $35 per share. If that prognosis turns out to be correct, the company’s stock could skyrocket 132% over the next year.

Tarlowe’s bullish view takes into account both near-term headwinds for the business, such as higher transportation costs, and the promising value that can be delivered by its teen-focused AE brand and brand. Aerie’s rapidly growing intimate apparel brand.

As you can probably imagine, retail stocks have surged over the past two quarters due to supply chain challenges. In the case of American Eagle Outfitters, the company paid extra to airlift its goods, which temporarily weakened its gross margin. If the US economy enters a recession – as a reminder, US gross domestic product in the first quarter reached minus 1.4% — retailers will undoubtedly be pinched.

Again, American Eagle Outfitters has proven time and time again to be a much better run retailer than most. For example, merchandise that doesn’t sell is moved quickly to ensure popular items are bought at or near full price. Minimizing discounting has been one of the company’s keys to maintaining such a strong dividend (nearly 4.8% yield).

As I have already pointed out, the price of American Eagle is also perfect. That’s not too low to depreciate its brand value (ahem, Aeropostale), nor too high to break the budget of teens, parents, and young adults (ahem, Abercrombie & Fitch).

But the real key to American Eagle Outfitters’ return to $35 per share will be Aerie. Aerie’s annual sales have increased 72% since the end of 2019, and AE management has responded by opening new Aerie locations. When coupled with investments in direct-to-consumer sales, Aerie has the potential to sustain double-digit revenue growth for years to come.

To stay in theme, I doubt $35 is a realistic price target within 12 months. However, $35 is a perfectly reasonable expectation at some point in the future.

Garland K. Long