One Amazing Dividend Stock to Buy Now
By: Jonathan Wolfgram,
One amazing dividend stock to buy now is a consumer finance company with double-digit yield and triple-digit-percentage returns.
It sounds too good to be true, but this company has impressed analysts time and time again. In the last year, the company has come into the limelight as a powerful investment among dividend investors.
Income investors are always looking for stable dividend payers like this one, but often fill their portfolios with excessively conservative stocks and missed opportunities. Many high-dividend equities overexpose investors to risk or have a deceptively high dividend yield caused by a quickly plummeting share price.
However, there exist equities that are not only safe investments but also show huge growth potential and pay massive dividends. One of those companies has grown nearly 200% in the last year and pays a dividend yield of 13%.
But those amazing dividend stocks are few and far between. To find them, we ran a screen with our affiliate partners at Stock Rover and used some very picky criteria. To start, the equities on the list must have received an overall dividend score putting them in the 95th percentile of all dividend-paying companies.
From there, we narrowed it down to those with positive returns over the last one-, three- and five-year periods. Those stocks also needed to have an analyst consensus rating of “Strong Buy” and offer a dividend yield of more than 8%.
We also were looking for stocks that are actively traded, requiring that their current momentum be scored by Stock Rover in the 70th percentile. Lastly, we wanted companies with a high probability of being undervalued — with estimated fair value (by discounted cash flow analysis) at least 10% higher than its current trading price.
And with all of those criteria, among all 2,700 stocks on North American Exchanges, we found exactly one company. The one amazing dividend stock to buy now is:
One Amazing Dividend Stock to Buy Now
OneMain Holdings (NYSE:OMF)
OneMain Holdings (NYSE:OMF) is a consumer financial services company that largely provides insurance and personal loan products. The majority of its profit is obtained from net interest income, but it also makes money servicing loans, completing strategic acquisitions and occasionally establishing joint ventures and strategic alliances.
OneMain Holdings Pays a Dividend Yielding Nearly 13%.
The company is a new dividend payer that made its first distribution in the beginning of 2019 and has paid a dividend every quarter since (as well as two very large special dividends). Its current distribution annualizes to $7.06, corresponding to a 12.9% yield. Combine this with its rapid dividend growth — a 98% increase in 2020 and 40% increase in 2021 — and analysts rank OMF as the best dividend payer in its industry, putting it as number one amongst all credit services companies and in the 98th percentile for all companies on North American exchanges.
OneMain Holdings has a unique dividend payment schedule: every second and fourth quarter, the company pays out a minimum amount per share, currently $0.45. Every first and third quarter, however, it supplements the payment and increases it considerably — its most recent dividend payment for the first quarter of 2021 was $3.95.
The dividend yield and price over the trailing 12-month period are charted below. As the share price has grown considerably over time, the dividend payment has been continually hiked to catch up to the increasing value of the company. With this trend in mind, if the share price increases further, the dividend distribution is likely to follow suit.
A note for reading this chart: dividend yield already takes share price into account. This would be a common graph among decent dividend payers had we charted dividend payments, but with yield, the growth is far more impressive. Ordinarily, as share price increases, all other things being equal, yield will go down in the short term — most growing companies would see a gradually decreasing yield followed by a quarterly uptick bringing the yield back to a level value. OneMain Holdings, on the other hand, has grown its dividend yield at a similar rate to its price, meaning the company is becoming more efficient and more generous with its dividends as it finds greater success.
Also, despite the uber-high dividend growth it takes to show yield increasing relative to price, the company has a payout ratio of only 63.3%, staying within a healthy range for sustainable payments.
Amazing Dividend Stock OMF has Grown Nearly 200% in the Last Year.
The spectacular level of growth for OMF stock makes the company’s increasing dividend yield more impressive still. Before adjusting for dividends, OMF has grown 189.3% in the trailing 12-month period, or 199.6% after taking dividend payments into account. For comparison, the S&P 500 grew 53.6% in the last year on a record bull-run, underperforming our stock pick by nearly 150%. The growth of OneMain Holdings is plotted against the S&P 500 below:
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Several variables contributed to this stellar performance. The company closed out Q4 2020 with top-line revenue of $1.23 billion and $2.67 in earnings per share (EPS), which corresponded with a 39% increase in EPS year-over-year.
One cause of OMF’s price increase is a surge of optimism for the company’s new credit card project. The initiative is expected to create an additional source of revenue and spur major growth in the company, putting it in a more powerful position in the consumer finance sphere over the next several years.
But driving high earnings was the increased demand in the market among working-class Americans for short-term loans. Although the surge in demand was largely caused by the novel coronavirus and the financial difficulty it posed to many families — a problem that seems to be resolving over time — technical metrics indicate OneMain Holdings has more growing to do yet.
Momentum Indicators Show OMF is Undervalued and Likely to Keep Going Up.
Two key momentum indicators, Money Flow Index (MFI) and Relative Strength Index (RSI), both point to a further increasing share price in the near future. MFI shows the conviction of a trend and is determined by evaluating both the price and volume over the last 14 days — when interpreting MFI, higher values mean the equity is likely overbought and lower values mean the equity is oversold.
RSI is interpreted in a similar way and determined by analyzing the magnitude of recent gains and losses. When looking to purchase an equity, lower values for both indicators mean investors are getting a bargain. That’s exactly what we see with OMF:
Both MFI and RSI have dropped in the recent past, meaning buying conditions are becoming more favorable. That said, with values of 47.13 and 57.24, respectively, MFI and RSI are both high enough still that the stock is receiving considerable attention and being actively traded.
Thus, with momentum indicators decreasing considerably over the last two weeks, the upward trend pushing OMF stock higher and higher is likely to continue. Even though the stock has seen astronomical growth in the last 12 months, these popular indicators say the company is still undervalued and its share price should continue to grow.
DCF Analysis Values OMF 19% Higher Than Its Current Share Price
OneMain Holdings further is an undervalued gem of a company, according to a simple discounted cash flow (DCF) analysis. Using Stock Rover to analyze its fundamentals, we valued the per-share fair value of OMF at $65.29, approximately 19% higher than its current trading price of $54.86.
This valuation is in line with the target price of analyst Michael Kaye, who has publicly praised the company and expects it to reach $65.00 in the near future. In a Q4 2020 earnings call, he called it, “One of the best stories in consumer finance and surprisingly still under the radar of many financial investors.”
Kaye is not alone in his valuation — 10n analysts currently cover OMF. All have rated it as a “Strong Buy,” with the last analyst upgrading a previous “Buy” rating in the last month. Such strong consensus among financial analysts is rare when discussing high-dividend paying, high-growth equities, but the strength of this amazing dividend stock is undeniable, making it one of the best dividend stocks to buy now.
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Jonathan Wolfgram is an editorial staffer who writes website content at Eagle Financial Publications. He graduated from the University of Minnesota with Bachelor’s degrees in Finance and Philosophy. Jonathan writes for www.DividendInvestor.com and www.StockInvestor.com.