Some investors prefer to focus on dividends rather than capital growth when it comes to investing. However, buying the highest-yielding dividend stocks may not necessarily generate satisfactory, much less spectacular, returns over a long time frame.
That's because high-yield dividend stocks offer such a big payout for a good reason. Investors typically either fear possible dividend cuts or that issues affecting the financial health of the business will send the stock lower, outweighing the aggregate amount of cash dividend payments received.
However, while so-called yield traps are commonplace in the world of high-yield dividend investing, right now there are two high-yielding financial stocks that have perhaps become oversold: UWM Holdings (UWMC 4.93%) and Western Union (WU 0.33%). Investors are concerned about them for different reasons, but the common denominator here, besides a high dividend yield, is that for both names, these concerns may be overblown.
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1. UWM Holdings
UWM Holdings is America's largest mortgage lender. The company specializes in wholesale mortgage lending, underwriting mortgages originated by independent mortgage brokers. During the pandemic-era housing boom, UWM experienced record growth.
Capitalizing on its then-success, UWM went public via a special purpose acquisition company (SPAC) merger in 2021. However, not too long after it went public, interest rates went up and homebuyer demand plummeted. As a result, earnings declined. The stock fell from its original SPAC price of $10 per share to prices as low as $3.80 per share earlier this year.
UWM's revenue and earnings have only partially recovered, but the company has made zero change to its dividend. Since going public, UWM has paid out a $0.10 per share quarterly dividend. At current prices, this gives the stock a forward dividend yield of almost 7%.
NYSE: UWMC
Key Data Points
Recently, the stock has started to bounce back. It now changes hands at about $5.80 per share. There's still doubt about the future of the housing market, but UWM could deliver stronger results in the quarters ahead. Falling interest rates may be starting to drive increased home sale volumes.
Also, as Chief Executive Officer Mat Ishbia noted earlier this year, UWM's efforts to use artificial intelligence to maximize the efficiency of its loan-servicing operations could result in as much as $100 million in annual cost savings. These factors suggest UWM remains well positioned to maintain its high dividend payout, and could meet or beat sell-side analyst estimates calling for earnings to more than double next year.
Although the stock trades at a forward price-to-earnings (P/E) ratio of 15, which is somewhat pricey for a financial stock, this level of earnings growth may be enough to propel the stock even higher.
2. Western Union
Western Union has been helping people move money across the country and across borders for more than a century. However, investors are concerned about this company's future. Specifically, investors worry that cheaper, faster payment remittance providers threaten Western Union's business in the long term.
As a result, the shares are trading at less than 5 times forward earnings. The stock also has a forward dividend yield of almost 11%. Nevertheless, Western Union could still make a recovery.
The company has been aggressively pursuing a digital transformation as well as expanding its travel money business. To top it all off, Western Union is also in the process of figuring out how to integrate stablecoin technology into its remittance business.
NYSE: WU
Key Data Points
The recent acquisition of Eurochange and a pending deal to acquire International Money Express could help bolster this digital pivot. These acquisitions also stand to produce cost synergies. Management anticipates the International Money Express deal to immediately add to earnings.
In its latest quarterly results, Western Union reported year-over-year adjusted earnings growth of 2%. Although that may sound insignificant, if the company's earnings continue to stabilize, the shares may be in for a major rebound. Even a modest amount of valuation expansion could lead to big gains for shares. Until then, you can receive a double-digit percentage dividend yield while this turnaround takes shape.
