Over long periods, Wall Street is a money machine for investors. But on a year-to-year basis, the stock market can be a bit of a guessing game. Last year, the three major U.S. stock indexes produced their worst returns since 2008. Unless you were short-selling equities or heavily invested in energy stocks, you probably had a rough year.
When Wall Street struggles, it’s common for investors to turn their attention to dividend stocks. Publicly traded companies that pay regular dividends are often able to do so because they’re recurringly profitable and have transparent long-term outlooks. In other words, they’re the types of companies you’d want to have in your portfolio during periods of heightened volatility — and Wall Street analysts know this.
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Although most Wall Street analysts and investment firms tend to be optimistic about stocks, some price targets imply more than just modest optimism. According to a select group of Wall Street analysts, three high-yield dividend stocks (companies with yields of 4% and above) offer up to 59% upside in 2023.
AT&T: Implied upside of 41%
The first high-octane income stock at least one Wall Street analyst believes can soar this year is telecom stock AT&T (NYSE: T). Analyst Ivan Feinseth of Tigress Financial set a $28 price target on AT&T stock last June, which equates to upside of 41% in shares, based on where they ended last week.
AT&T brings four well-defined macro and company-specific catalysts to the table that give it a real chance to reach Tigress Financial’s lofty price target. To start with, wireless access has evolved into a basic necessity for most Americans over the past two decades. What this means is that economic downturns don’t tend to meaningfully increase customer churn rates. So AT&T can generate predictable operating cash flow in any economic environment.
Second, AT&T should benefit from the 5G wireless revolution for years to come. Upgrading from 4G to 5G download speeds took wireless providers about a decade. This decade-long gap has left consumers and businesses eager to upgrade to faster download speeds. Even though upgrading wireless infrastructure is costly, the benefit of increased data consumption, which is where AT&T’s wireless segment generates most of its profit, is well worth it.
Third — and building on the previous catalyst — AT&T has seen sizable broadband gains for years. In 2022, AT&T wrapped up its fifth consecutive year with at least 1 million AT&T Fiber net additions. Despite broadband’s growth heyday being two decades ago, these new customers are helping to boost AT&T’s operating cash flow and are providing bundling opportunities that can lift margins.
Lastly, AT&T has enjoyed more financial flexibility since content arm WarnerMedia was spun off and merged with Discovery to create Warner Bros. Discovery in April 2022. As part of this spinoff and merger, Warner Bros. Discovery paid AT&T cash and assumed certain lots of debt previously held by AT&T via WarnerMedia. With a healthier balance sheet, AT&T’s 5.7% yield is as solid as ever.
Alliance Resource Partners: Implied upside of 34%
A second ultra-high-yield dividend stock that at least one Wall Street analyst believes can leap higher in 2023 is energy stock Alliance Resource Partners (NASDAQ: ARLP). Alliance Resource, which offers a mouthwatering 13% yield, is expected to make a run at $30 per share, according to analyst Mark Reichman of Noble Financial. If this high-water price target were to be hit, it would represent 34% upside for the company’s stock.
Alliance Resource Partners generates most of its revenue as a coal producer. You might be under the impression that the coal industry has been buried given the rise of renewable energy sources, but this couldn’t be further from the truth. Russia’s invasion of Ukraine, coupled with the COVID-19 pandemic reducing drilling, exploration, and infrastructure investments for the oil and gas industry, has broken the global energy supply chain and created an abundance of demand for coal. The result has been a substantial uptick in the per-ton sales price of coal.
Aside from higher coal prices, Alliance Resource Partners benefits from its forward-looking operating model. This is a company that seeks to lock in volume and price commitments up to three years in advance. As of late January 2023, it had 34.7 million tons of coal (94% of its median forecast production this year) committed and priced in 2023. Another 23.7 million tons for 2024 were already spoken for. Booking this production well in advance leads to highly predictable cash flow.
To expound on this point, Alliance Resource Partners’ management team has always taken a conservative approach toward expansion. Slow-stepping production increases has helped the company avoid ballooning its outstanding debt. Alliance Resources arguably has the best balance sheet among coal stocks.
In addition to coal, the company holds oil and natural gas royalties. Very simply, if the price of oil and natural gas rises, the company’s segment adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) should climb, too. Alliance Resource Partners has been actively adding to its oil and gas royalties portfolio.
With Alliance Resource Partners’ stock valued at less than 4 times Wall Street’s consensus earnings in 2023, a $30 price target does seem achievable.
The electric Mustang Mach-E is one of 30 new EV models Ford expects to have launched globally by the end of 2025. Image source: Ford.
Ford Motor Company: Implied upside of 59%
The third high-yield dividend stock that one Wall Street analyst believes can rip higher in 2023 is auto giant Ford Motor Company (NYSE: F). Analyst John Murphy with Bank of America Securities has a price target of $21 on Ford. If hit, this would work out to a scorching 59% upside this year for an auto stock yielding a hearty 4.6%.
Without question, a lot of the excitement surrounding Ford and its peers has to do with the move to electrify their product lineups over time. With consumers and businesses steadily moving to clean-energy transportation solutions, promoting electric vehicles (EVs) is the sustained organic growth opportunity Detroit’s automakers have been waiting decades for.
For its part, Ford has set aside a whopping $50 billion for EVs, autonomous vehicles, and battery development/production through 2026. It plans to introduce 30 new EV models globally by the end of 2025, with annual EV production expected to tip the scales at north of 2 million by the end of 2026.
Not to be forgotten during this EV push is just how dominant Ford’s F-Series truck line is domestically. The F-Series has been America’s top-selling truck for 46 consecutive years, and the best-selling vehicle overall in the U.S. for 41. Trucks offer substantially juicier vehicle operating margins than sedans. Ergo, maintaining the dominance of its F-Series remains paramount to Ford’s ongoing success.
While $21 is a price target that makes sense for Ford at some point in the future, it may not be in 2023. Last week, CEO Jim Farley candidly told his investors that supply chain challenges and higher expenses have caused his company to fall short of production expectations. Righting the ship could take a couple of quarters, and would likely keep Ford from reaching Murphy’s $21 price target this year.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Sean Williams has positions in AT&T, Bank of America, and Warner Bros. Discovery. The Motley Fool has positions in and recommends Bank of America and Warner Bros. Discovery. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
