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Income Investors: 1 High-Yield Stock to Buy, 1 to Avoid

The market opened in the red today amid fears of a looming global economic slowdown. Moreover, with the Fed committed to raising rates to combat rising inflation and the Russia-Ukraine war creating its own uncertainties, stock market volatility might increase. Given the market turbulence, we believe high-yield stock Star Bulk Carriers (SBLK) could be an ideal bet for income investors. Conversely, we think the shares of Orchid Island Capital (ORC) are best avoided despite their high yield, considering the company’s weak fundamentals.

The stock market opened in the red today, extending the April market sell-off that has pushed the Dow Jones Industrial Average lower for four-straight weeks. The Nasdaq Composite is down about 10% for the month, while the S&P 500 and Dow retreated by some 6% and 3%, respectively. The S&P 500 is back in correction territory, plunging approximately 12% from its high, as investors remain worried about a looming global economic slowdown amid concerns about COVID-19 case spikes in China, the Russia-Ukraine war, and rising inflation.

In addition, Federal Reserve Chairman Jerome Powell has affirmed that the central bank might raise the rates as soon as next month in the face of prices rising at their fastest pace in more than 40 years. “I would say 50 basis points will be on the table for the May meeting,” Powell said.

Given the market’s heightened volatility, we think fundamentally sound high-yield stock Star Bulk Carriers Corp. (SBLK) could be a quality addition to one’s portfolio to ensure a stable stream of income. Conversely, however, we think it could be wise to avoid Orchid Island Capital, Inc. (ORC) despite its high yield, considering the company’s bleak financial positioning, which makes the sustainability of its dividend payouts questionable. Also, ORC’s dividend payouts have declined over the past few years.

Stock to Buy:

Star Bulk Carriers Corp. (SBLK)

SBLK is a shipping company that engages in the worldwide ocean transportation of dry bulk cargoes. The company transports a range of major bulks and minor bulks. It also provides vessel management services and is based in Marousi, Greece.

On April 6, 2022, SBLK announced the signing of a joint letter of intent with its partners BHP Group Ltd. (BHP), Rio Tinto Plc (RIO), and Oldendorff Carriers GmbH & Co. to develop an iron ore Green Corridor between Australia and East Asia through the establishment of a consortium, that is expected make the deployment of near-zero-emission shipping more feasible and favorable. This should help the company create the foundation for maritime energy transition, which aligns with its vision to phase out GHG emissions.

SBLK’s annual dividend yields 27.86% at its current share price. The company declared its last quarterly dividend of $2.00 per share on February 16, 2022. The dividend was payable on or about March 15.

SBLK’s total revenues increased 16.9% year-over-year to $499.86 million in the fiscal fourth quarter ended December 2021. Its operating income grew 620.7% from the year-ago value to $313.89 million. The company’s net income increased 980.7% year-over-year to $300.15 million, while its EPS came in at $2.93, up 910.3% from the prior-year quarter.

The consensus EPS estimate of $1.37 for the fiscal first quarter ended March 2022 represents a 281.5% year-over-year improvement. The consensus revenue estimate of $272.78 million for the same quarter represents a 70.1% increase from the same period last year.

SBLK has gained 65.4% over the past year and 26.6% year-to-date to close the last trading session at $28.71.

SBLK’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, translating to Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

SBLK has an A grade in Growth and a B in Momentum, Quality, and Sentiment. It is ranked #6 of 45 stocks in the A-rated  Shipping industry.

Beyond what is stated above, we have also rated SBLK for Stability and Value. Get all the SBLK ratings here.

Stock to Avoid:

Orchid Island Capital, Inc. (ORC)

ORC is a specialty finance company that invests in residential mortgage-backed securities (RMBS). The company’s investment strategy focuses on two categories of Agency RMBS - traditional pass-through Agency RMBS and structured Agency RMBS.

ORC’s $0.54 annual dividend yields 18.56% at its current share price. On April 13, 2022, the company declared its monthly dividend for April 2022 of $0.045 per share, payable on May 27, 2022. However, its dividend payouts have declined at a CAGR of 9.6% over the past three years and 15.1% over the past five years.

For the fiscal fourth quarter ended December 31, ORC’s expenses increased 56% year-over-year to $4.37 million. Net income decreased 370.4% from the prior-year quarter to a negative $44.56 million. Net income per share declined 217.4% from the same period the prior year to a negative $0.27.

Analysts expect ORC’s EPS for the fiscal quarter ended March 2022 to come in at $0.17, indicating a decrease of 32.3% year-over-year. Also, the company’s EPS is expected to decline 25.6% year-over-year to $0.69 in the ongoing fiscal year (fiscal 2022). The company did not surpass the consensus EPS estimates in any of the trailing four quarters.

The stock has declined 45.2% over the past year to close its last trading session at $2.91.

ORC’s POWR Ratings reflect this bleak outlook. The stock has an overall rating of D, equating to Sell in our proprietary rating system.

ORC also has a Stability, Sentiment, and Quality grade of D and a Value and Growth grade of C. In the D-rated, 31-stock  REITs - Mortgage industry, it is ranked #27.

Click here to see the additional POWR Ratings for ORC (Momentum).

SBLK shares were trading at $26.65 per share on Monday afternoon, down $2.06 (-7.18%). Year-to-date, SBLK has gained 25.93%, versus a -10.42% rise in the benchmark S&P 500 index during the same period.

About the Author: Komal Bhattar

Komal's passion for the stock market and financial analysis led her to pursue investment research as a career. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.


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