Investment firm Morgan Stanley had set a 3,900 year-end target for the S&P 500 – and it’s already obsolete. The index stands at 4,196, a 7.5% above Morgan Stanley’s target. Year-to-date, despite some volatile trading, the S&P is up nearly 12%.

Mike Wilson, chief investment officer and US equity strategist for Morgan Stanley has taken a deep dive into the current state of the market, and believes that values have peaked – at least for now.

“We continue to believe valuations are too high and will adjust materially lower over the next six months… We’ve left the early cycle part of this recovery… the reopening of the economy is likely to put upward pressure on costs and downward pressure on margins. This will come as a surprise to now lofty earnings estimates, in our view,” Wilson explained.

The markets are getting no help from tax policy, either. Wilson notes that the Biden Administration is pushing to increase the corporate tax rate to 28%, and while it is likely to compromise at a slightly lower rate, Wilson sees increased corporate taxes as a headwind for the S&P.

For retail investors, this environment points toward defensive stocks, to insulate the portfolio from share depreciation, and that will naturally bring up the subject of dividend stocks. The dividend payment provides a steady income stream, one that can compensate for lower share gains when markets hit a plateau.

Bearing this in mind, we used the TipRanks' database to zero-in on two stocks that are showing high dividend yields – on the order of 7%. Each stock also holds a Strong Buy consensus rating; let’s see what makes them so attractive to Wall Street’s analysts.

Hercules Capital (HTGC)

We’ll start with Hercules Capital, a business development company that puts a twist on its niche – it specializes in venture capital. Hercules provides funding and support for science-oriented, early-stage client companies. The company has $2.6 billion in assets under management, and in 18 years of business has committed $11.6 billion in funding to more than 530 clients.

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For the first quarter of this year, Hercules reported a record level of new debt and equity commitments, at $530.9 million. The company had $550 million in available liquidity at quarter’s end, and a net investment income of 30 cents per share, based on a total of $34.6 million.

During the quarter, Hercules also declared its regular dividend, at 32 cents per common share. Afterward, the company added a supplemental dividend of 7 cents per share, making the to total payment 39 cents in the current quarter. That payment gives a yield of 7.5%.

Covering the stock for RBC Capital, 5-star analyst Kenneth Lee writes: “HTGC's first private credit fund could potentially expand opportunities down the line. Pipeline of potential investments looks robust. We continue to favor HTGC's specialized niche of direct lending to growth-oriented, tech-related companies, well-supported dividends and above-peer avg ROE generation potential.”

The analyst added, "We continue to believe HTGC’s common dividends are well-supported; our forecasted NII/sh for FY21/FY22 continue to be above the base dividend level. Further, the 94c/sh in spillover income provides additional support."

To this end, Lee rates HTGC an Outperform (i.e. Buy), and his $19 price target implies a one-year upside potential of ~14%. Based on the current dividend yield and the expected price appreciation, the stock has ~21% potential total return profile. (To watch Lee’s track record, click here)

Wall Street’s analysts are in complete agreement here; all 10 of the recent reviews on HTGC shares are positive, making the Strong Buy consensus rating unanimous. The stock is selling for $17.03 and the $18.13 average price target suggests ~12% upside potential. (See HTGC stock analysis on TipRanks)

Gladstone Commercial (GOOD)

We’ll shift gears slightly – but stay in the financial sector – for our next stock. Gladstone Commercial is a real estate investment trust (REIT), and as its name suggests, the company focuses on commercial real estate. Gladstone’s portfolio is made up mainly of industrial and office properties, both single-tenant and anchored multi-tenant. The portfolio includes 120 properties across 27 states, with a total of 107 tenants. Gladstone boasts that its property occupancy rate has never dipped below 95% since the company went public in 2003; the current occupancy rate is 95.5%.

Another feature of Gladstone’s portfolio is the long-term nature of the leases. This helps to lock in the income stream, maintaining steady profits even when the macroeconomic situation is unstable. Gladstone has seen its quarterly revenue remain between $33 million and $34.6 million through the past 5 quarters.

The most recent quarter, 1Q21, Gladstone showed $34.6 million in total revenue, the top of that range. The company collected 98% of the rents due during the quarter, and renewed leases on over 192,000 square feet of property, with lease terms set between 6.6 and 11.8 years.

Importantly for investors, Gladstone also declared its dividend for the quarter. The company pays out monthly, and in April it declared a 12.5 cent payment for each of the months April, May, and June. This adds up to 37.5 cents quarterly, or $1.50 per common share annualized. At that rate, the dividend yields 7.2%.

Craig Kucera, 5-star analyst from B. Riley Securities, writes of this company: “GOOD's occupancy is improving and acquisition volume is expected to pick up during the remainder of 2021… GOOD's focus on investing in smaller industrial properties located in secondary markets continues to allow for acquisition yields ahead of the company's cost of capital and we find shares attractive, trading at 100% of our NAV estimate…”

Unsurprisingly, Kucera rates GOOD shares a Buy along with a $23 price target, suggesting a 10% upside. (To watch Kucera’s track record, click here)

While there are only 3 recent reviews on this stock, all are positive, making the analyst consensus rating a Strong Buy. GOOD has an average price target of $23, matching Kucera’s above, and a current trading price of $20.92. (See GOOD stock analysis on TipRanks)

To find good ideas for dividend stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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