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With the Federal Reserve aggressively hiking interest rates to combat inflation, famed billionaire investor Howard Marks sees risks for corporate debt defaults rising. Yet his own portfolio appears well-positioned with sizable holdings in two high-dividend stocks.
Marks, the co-founder of $179 billion alternative asset manager Oaktree Capital Management, warned in a recent Bloomberg interview that the Fed’s rapid rate hikes are making it much harder for companies to service their debts.
Over the last 18 months, the Fed has raised short-term rates 11 times, lifting them to a range of 5.25%-5.50% — the highest since 2000. While the tightening monetary policy has succeeded in cooling inflation to a 15-month low of 3% in June, Marks cautioned the substantially higher borrowing costs will likely cause more defaults.
“When you go through a period when it’s super easy to raise money for any purpose or no purpose, and you go into a period when it’s difficult to raise money even for a good purpose, clearly many more companies are going to flounder,” he told Bloomberg.
Value Investor Focused on Dividends Amid Volatility
Yet despite the economic risks Marks highlights, his own holdings suggest he has positioned his portfolio to withstand market turbulence. According to TipRanks data, the veteran value investor holds sizable stakes in two high-dividend stocks:
- Sitio Royalties Corp. (NYSE: STR), a mineral rights company yielding 6%
- Oaktree Specialty Lending Corp. (NASDAQ: OCSL), a specialty lender yielding around 11%
Both names garner ‘Strong Buy’ ratings from Wall Street analysts as well, implying upside potential despite the challenging macro environment.
Sitio Royalties: Steady Cash Flow From Oil & Gas Rights
Sitio Royalties is focused on acquiring and managing mineral and royalty interests tied to oil and gas production. This provides steady cash flow as Sitio collects payments from drilling and exploration on its properties without operating rigs itself.
The company targets high-quality shale basins where production costs are low, enabling its holdings to generate income through commodity price cycles. Sitio has made over 190 acquisitions so far, including $247.9 million in new Permian Basin deals since March funded with a mix of equity and cash.
Sitio’s Q2 results showed 50% year-over-year revenue growth to $136.5 million, though earnings declined on non-cash impairment charges. The company pays a substantial dividend currently yielding 6.07% that Marks’ 13 million shares bring him over $20 million in annual income.
Stifel analyst Derrick Whitfield sees Sitio offering significant upside and estimates it can return 100% of its enterprise value by 2030 through targeted acquisitions. He rates the stock a Buy with a $33 price target implying 25% gains.
Oaktree Specialty Lending: Marks’ Own 11% Dividend Payer
Marks also holds 1.85 million shares of Oaktree Specialty Lending, a specialty finance company he took over in 2017. Oaktree provides customized lending solutions to middle-market firms and pays an ultra-high 11% dividend that Marks’ stake yields over $15 million annually.
The business development company did report a slight increase in non-performing loans last quarter. However, KBW analyst Ryan Lynch remains confident in Oaktree’s credit underwriting and sees Marks’ experience navigating challenging markets as a positive.
Lynch rates OCSL stock a Buy with a $22 target suggesting 9% upside. Along with the 11% dividend, that provides potential total returns around 20%.
Billionaire Positioned to Endure Volatility
While warning of corporate defaults as rates rise, Marks’ significant holdings in these two high-dividend payers indicate his own portfolio is positioned to generate income through volatile conditions. Investors seeking dividends may want to take a closer look at both names.
And for ongoing coverage of how markets are responding to interest rate hikes, be sure to follow our real-time news feed. To search for dividend stocks like the names Marks favors, head over to our stock screener.