3 Top Dividend Stocks With 20% Upside Potential

It's safe to say the Federal Reserve seems to be in no mood to cut interest rates anytime soon. Despite a pause in rate hikes at the latest meeting, the central bank's “higher for longer” stance on rates has made it clear that the Fed remains steadfast in its resolve to bring inflation back down toward its target rate of 2%.

Against the backdrop of a persistently hawkish Fed, September is living up to its reputation as one of the toughest months for the stock market. While the S&P 500 Index ($SPX) is down 4.8% for the month so far, the Nasdaq Composite ($NASX) has corrected by an even sharper 6.5% over the same period.

As share prices continue to free-fall, investors seem to have lost their appetite (at least temporarily) for higher-risk, growth-oriented stocks. However, income plays are holding up relatively well; the Vanguard High Dividend Yield ETF (VYM) - one of the largest dividend-focused funds, with $48.67 billion AUM - is down less than 3% since the start of September, outperforming the broad-based equity indices. And over the last three months, VYM is just about flat, compared to negative returns for the S&P and Nasdaq.

With this in mind, here we'll highlight three top income stocks with solid dividend yields, strong fundamentals, and bullish forecasts from Wall Street.

PulteGroup

One of the largest homebuilders in the U.S., PulteGroup (PHM) has been around for more than seven decades now, with more than 800,000 homes built. It designs, builds, markets, and sells new single-family detached homes, townhomes, and condominiums under the Pulte Homes and Del Webb brands. The company also provides mortgage financing and title insurance services through its wholly-owned subsidiary, Pulte Mortgage, LLC. 

The homebuilder's current dividend yield is at 0.87%, and this payout has increased by 69% over the past five years.

PulteGroup commands a current market cap of $16.22 billion, and the stock has rallied significantly in 2023 so far. PHM is up 63% YTD, easily outperforming the broad market.

The company's latest results for the second quarter ended June 30 were impressive, as net new orders increased by 24% yearly to 7,947 homes - despite a 29.5% YOY drop in backlog value. PulteGroup reported EPS of $3.21 (including a $0.21 insurance benefit), up 17.6% from the prior year, and well beyond the consensus estimate of $2.52. Notably, PulteGroup's EPS have topped analysts' expectations in four out of the past five quarters. 

Homebuilding revenues rose by 7.9% from the prior year to $4.1 billion, aided by an increase in closings (up 5% YoY) and average sales price (up 3% YoY). Revenues have climbed sequentially in three out of the past four quarters.

Analysts expect PulteGroup to report 3.7% earnings growth in the current quarter, and 7.87% for FY 2023.

Overall, analysts remain upbeat about the prospects for the builder. The consensus rating is a “Strong Buy” with a mean target price of $96.57, which indicates upside potential of about 30% from current levels. Out of 14 analysts covering the stock, 10 have a “Strong Buy” rating, 1 has a “Moderate Buy” rating, and 3 have a “Hold” rating.

KKR & Company

Widely known as one of the biggest private equity players in the world, Kohlberg Kravis Roberts & Co. - or KKR & Company (KKR) - was founded in 1976. Beyond private equity, KKR manages a diverse set of alternative asset classes, such as energy, infrastructure, real estate, and credit, primarily through its investment partnerships. 

KKR currently commands a market cap of $54.5 billion and offers a dividend yield of 1.01%. Its annual payout has increased in each of the last three years.

Shares of KKR are up 35% on a YTD basis, outperforming both the S&P and the broader Nasdaq Composite.

KKR reported strong numbers for its second quarter, as revenues rocketed and earnings beat Wall Street's expectations. Revenues for the quarter came in at $3.6 billion, up considerably from the previous year's figure of $323.4 million. Fee-related earnings were up 30.6% to $602.31 million, accounting for nearly 17% of total revenues.

EPS of $0.73 was down 24% from the prior year, but topped the consensus estimate of $0.71. In fact, the company's EPS has surpassed expectations in each of the past five quarters. Also, assets under management (AUM) rose by 6% from the prior year to $519 billion.

Meanwhile, the company has continued to deploy capital strategically in recent months. Some of the notable investments made by the company lately include its acquisition of Simon & Schuster for $1.62 billion from Paramount Global (PARA), the increase of its stake in India's Reliance Retail Ventures, and acquiring a 20% stake in Asian telecommunications company Singtel.

Analysts have mixed expectations about KKR's earnings growth prospects. Wall Street is predicting a 5.1% decline in fiscal 2023 earnings, followed by 45% growth in FY 2024.

Analysts are upbeat about KKR in general, judging by the consensus rating of “Strong Buy” with a mean target price of $74.23. This denotes an upside potential of about 20% from current levels. Out of 14 analysts covering the stock, 12 have a “Strong Buy” rating, 1 has a “Moderate Buy” rating, and 1 has a “Hold” rating.

BorgWarner

We round out our list with Michigan-headquartered automotive and e-mobility supplier BorgWarner (BWA). The century-old company designs, manufactures, and supplies a wide range of technologies and solutions for internal combustion, hybrid, and electric vehicle (EV) products for light, medium, and heavy-duty vehicles, and off-highway applications. 

The company currently commands a market cap of $9.70 billion, and offers a dividend yield of 1.35%.

BorgWarner's share price has gained about 16% year to date - not quite in line with the Nasdaq's performance, but better than the S&P 500.

BorgWarner's results for the latest quarter were solid, as the company reported growth in revenue as well as earnings. Net sales for the second quarter came in at $4.5 billion, up 20.2% from the prior year, with an improvement in gross margins driven by the Air Management and Drivetrain & Battery Systems segments. 

EPS for the quarter stood at $1.05, up 41.9% from the year prior, and better than the consensus estimate. The company's EPS over the last five quarters has managed to beat expectations on three occasions, while revenues have grown sequentially in each of the past four quarters.

Although the company's free cash flow and net cash from operating activities declined, its debt levels have remained relatively flat since the beginning of the year.

Strategically, the company's focus on the rapidly growing EV market is noteworthy. Apart from its acquisitions of EV battery manufacturer Akasol in 2021 and light vehicle eMotor manufacturer Santroll in 2022, BorgWarner recently spun off its Fuel Systems and Aftermarket segments into a separate, publicly-traded companynamed PHINIA (PHIN) to unlock value.

Analysts remain skeptical about BWA's earnings growth in the near term, with declines of 28% and 18.3% expected in the current quarter and FY 2023, respectively.

Nevertheless, analysts are in BWA's corner, with a consensus “Strong Buy” rating for the stock and a mean target price of $52.14. This indicates an upside potential of about 28% from current levels. Out of 14 analysts covering the stock, 10 have a “Strong Buy” rating, 1 has a “Moderate Buy” rating, and 3 have a “Hold” rating.