OWL - 3 Best Dividend Stocks For 2024

2023-12-11 08:05:00 ET

Summary

• I don't invest only in REITs.
• I also invest in other dividend stocks to diversify my portfolio.
• I highlight 3 of my top picks for 2024.

Most of you here on Seeking Alpha know me as a REIT analyst ( VNQ ).

This is my main field of interest and it is where I invest most of my capital.

But not all of it!

Diversification is said to be "the only free lunch" in the financial world and I don't miss out on it.

My portfolio is heavily allocated towards REITs and I seek to diversify its risks by investing in parallel in other dividend stocks, growth companies, bonds, and even private equity.

In what follows, I will highlight three of my favorite dividend stocks to buy for 2024:

Patria Investments ( PAX )

Asset management is one of my favorite businesses.

It essentially allows you to participate in the returns of an asset class without having to invest the capital yourself.

You earn fees for managing the investments for others, and so if you are able to convince investors to invest with you, it can be a very rewarding business.

It is highly scalable, it is capital-light, and the ROIs are high.

The biggest alternative asset manager in the world is Blackstone ( BX ) and here is its performance since going public:

It was massively rewarding because it was able to rapidly scale its assets under management all while charging high fees for its investment vehicles.

But unfortunately today, Blackstone has become very big with a trillion of capital under management and growing from here will be a lot more challenging.

Fortunately, there are other alternatives, and I think that Patria Investments is set to replicate Blackstone's success story:

Patria is essentially the Blackstone of Latin America. Today, it is the leader for private equity, real estate, credit and other alternative investments in the region and it manages about $30 billion of capital.

It has a fantastic track record and a very good reputation, and as more investors turn to Latin America, I expect them to partner with Patria to manage their investments.

Latin America today stands out as a very attractive investment frontier for global investors because:

• Russia's invasion of Ukraine and China's "no limit" partnership with Russia and its own aggressive stance towards Taiwan has made big parts of emerging markets highly uncertain.
• Latin America is not perfect, but it has historically served as a "safe-haven" during times of global turmoil and provides valuable diversification benefits in today's world.
• Meanwhile Latin and Central America also benefit from the growing trends of near-shoring.
• And there are many other reasons to invest in Latin America:

As a result, Patria is today enjoying rapid growth and they expect to nearly double in size by 2025:

They expect this growth in assets under management to roughly double their earnings per share:

Best of all, they believe that they can achieve most of this growth with very little capital of their own, and therefore, they should be able to pay out most of their earnings in dividends to their shareholders.

Patria has the same dividend policy as Blackstone, which is to distribute 85% of their distributable earnings. This means that their dividend is variable because they don't realize performance fees every year.

But averaging out the impact of these performance fees, we expect the dividend yield is to be around 7-8% and this dividend is expected to grow significantly over the coming years. Also, because the company is structured in the Cayman Islands, there is no withholding tax for investors. That's a unique advantage as it allows dividend investors to participate in the growth of Latin American markets in a way that's tax-efficient.

A final important point is that PAX has zero debt and plenty of liquidity on its balance sheet. This makes it a lot more defensive in today's high interest rate environment.

Blue Owl Capital ( OWL )

To stay on the same theme... I am also heavily invested in Blue Owl Capital, which is another leading asset manager with rapid growth potential and great prospects as a dividend stock.

But Blue Owl has a different focus. It is a leader in private credit, which is today experiencing rapid growth following the recent surge in interest rates.

Like many other investors, I think that now is a great time to allocate capital to private credit strategies because:

• We have likely reached peak interest rates.
• Inflation is cooling down.
• The world is highly uncertain.
• Most equities are expensive relative to interest rates.

As a result, Blue Owl is experiencing rapid growth in its assets under management right now:

I would add that this is nothing new.

Blue Owl has a fantastic track record of growing its assets under management and fee income.

It has grown its total management fees by over 40% annually since going public:

That's very impressive.

They achieved this because they have a great track record, and a strong reputation, and today's environment favors their asset classes.

The management has stated that their goal is to reach $1 of annual dividend in 2025.

That would put the forward dividend yield at 7.5% based on today's share price, and rapid growth would continue from there. The management made it very clear on their recent earnings call that they are 100% focused on dividend growth:

"Dividend growth is our north star. It reflects our pace of growth, but also informs about the quality of the earnings underlying that growth and the confidence we have in the staying power of those earnings. It’s a metric that captures all aspects of our business, including fundraising, deployment, revenue growth, embedded future earnings and so on. And for that reason, it’s one of the metrics that we think investors should be most focused on for us."

I think that $1 by 2025 may be a bit of a stretch given the world we live in, but even if they fall short of that, the dividend will still grow rapidly and the yield is today already quite compelling at 5%.

I would add that they have an excellent balance sheet with a strong BBB credit rating and an average debt maturity of 12 years. Therefore, just like PAX, they shouldn't be heavily impacted by the recent surge in interest rates.

RCI Hospitality ( RICK )

Finally, I want to highlight RCI Hospitality, which is the only publicly listed company that focuses on nightclub investments.

Ever since it changed its capital allocation policy in 2016, it has been able to grow its FCF per share by about 20% annually by acquiring assets at 25-33% EBITDA yields, and earning huge spreads over its cost of capital.

I believe that this growth is set to continue and it will eventually lead to a sizable dividend.

Today, most investors don't see RICK as a dividend stock and won't buy it for this reason.

After all, its yield is just 0.7%.

But this dividend is growing rapidly for 8 years now and the payout ratio is still just about 3% of their FCF.

I expect this growth to continue for a long time to come and if eventually, they run out of clubs to acquire, and their stock isn't discounted enough for buybacks (which they do a lot as well), they may materially bump up their dividend to distribute more of it to shareholders.

So yes, today's yield is low, but 5-10 years from now, I could be very significant for investors who buy it today. If they distributed just 50% of their FCF in the form of dividends, the yield would be around 6.5%.

Priced at just 8x FCF and growing at such a rapid pace, RICK is my favorite low-yielding fast-growing dividend growth stock.

Bottom Line

I invest heavily in REITs, but I also diversify into other sectors.

PAX, OWL, and RICK are three good examples of that.

For further details see: