3 High-Yield Dividend Stocks With Up to 132% Upside, According to Wall Street

If history is used as a guide, one of the smartest ways to make money on Wall Street is to buy dividend stocks.

Back in 2013, J.P. Morgan Asset Management, a division of banking giant JPMorgan Chase, released a report that examined the average annual return of dividend stocks to non-dividend payers over a four-decade period (1972-2012). The comparison showed that income stocks ran laps around the non-dividend stocks, with an annual average return of 9.5% versus 1.6% over 40 years.

But not all dividend stocks are created equally. Following an aggressive sell-off in equities since the beginning of the year, select Wall Street analysts believe the following three high-yield dividend stocks are poised for big upside. Based on analysts’ lofty price targets, these passive income powerhouses offer upside ranging from 66% to 132% over the next 12 months.

Citigroup: Implied upside of 66%, 4.23% yield

The first high-yield stock with some serious upside potential is one of America’s largest banks by assets, Citigroup (C 2.85%). According to Wells Fargo analyst Mike Mayo, Citigroup can hit $80, which would represent a cool 66% upside from where shares ended in April. 

Mayo’s optimism on Citigroup is primarily based on the job Jane Fraser has done since taking over as CEO in March 2021. Mayo is a big fan of Fraser’s capital allocation strategy, which involves selling off certain international assets and redeploying money to higher-growth initiatives. Interestingly, Mayo is also a critic of Citigroup’s board, which he believes should mostly be replaced following years of share-price underperformance.

There are two issues that have long haunted Citigroup and its shareholders. First, the company’s regulatory oversight has been lacking. Whereas Bank of America has moved well past its fines and settlement phase tied to the financial crisis, Citigroup continues to struggle with litigation and settlements. It’s effectively turned into a “show-me” stock, with investors waiting for Fraser to show them that Citi can move past its previous issues.

The second problem has been Citigroup’s overseas exposure. In the 2000s, having international exposure was considered a good thing for big banks. But with Europe facing a debt and growth crisis, and Asia having become a supply chain disaster due to COVID-19, Citi’s international exposure has been a crutch.

If there is a silver lining here, it’s that interest rates are set to climb in the United States. Bank stocks generally see their net interest income rise on outstanding variable-rate loans when the Federal Reserve lifts its federal funds target rate. The magnitude of these hikes should help offset weakness in noninterest income.

Citigroup is also quite inexpensive, relative to its book value. Shares can currently be scooped up for a 48% discount to book. For extremely patient investors, Citigroup could be a bargain. However, an $80 share price within 12 months is probably not in the cards.

Innovative Industrial Properties: Implied upside of 101%, 4.84% yield

Another high-yield dividend stock with blistering upside potential is cannabis-focused real estate investment trust Innovative Industrial Properties (IIPR 0.06%). Analyst Thomas Catherwood of BTIG believes IIP, as the company is more commonly known, can reach $290 a share. This would represent as much as 101% upside from where shares ended last week.

In particular, Catherwood has previously pointed to IIP’s ability to “identify talent” in its tenants. By this, Catherwood is referring to IIP’s success in leasing its cultivation and processing facilities to established multi-state operators that are highly likely to thrive and continue to pay rent for a long time to come. Additionally, Catherwood believes increased competition and better capital availability won’t impact IIP’s operating model. 

The interesting thing about Innovative Industrial Properties is that it might be the only marijuana stock rooting against federal legalization and cannabis banking reforms. As long as weed remains a federally illicit substance, IIP is able to benefit from its sale-leaseback arrangements. Since access to traditional banking solutions can be hit and miss, IIP has been acquiring facilities in cash and immediately leasing those assets back to the seller. These arrangements provide cash to pot companies and allow IIP to land long-term tenants.

Investors can also appreciate the cash flow predictability of Innovative Industrial Properties’ operating model. As of the end of April, IIP owned 109 properties spanning 8.1 million square feet of rentable space in 19 states.  Earlier this year, the company reported that all of its properties were leased, with a weighted-average lease length of more than 16 years.

As an added bonus, IIP passes along inflationary rental hikes to its tenants each year, as well as collects a 1.5% property management fee that’s tied to the base annual rental rate for each property. In other words, there’s a modest organic growth component that can help lift its operating income.

Over the past five years, IIP’s quarterly dividend has grown by 1,067%. With the company valued at only 20 times Wall Street’s forward-year earnings forecast and growing by an estimated 37% in 2022 and 24% in 2023, a $290 price target is perfectly reasonable. Perhaps not in the next 12 months, but in the not-too-distant future.

American Eagle Outfitters: Implied upside of 132%, 4.77% yield

However, the crème-de-la-crème of upside opportunity among high-yield dividend stocks, at least on this list, is specialty retailer American Eagle Outfitters (AEO -2.17%). According to analyst Corey Tarlowe of Jefferies Financial Group, American Eagle is a “buy” that’s worth $35 a share. If this prognostication proves accurate, shares of the company could rocket higher by 132% over the next year.

Tarlowe’s optimistic view takes into account both near-term headwinds for the company, such as higher freight costs, and the promising value that can be delivered by its teen-focused AE brand and rapidly growing intimate apparel brand Aerie. 

As you can probably imagine, retail stocks have taken it on the chin over the past two quarters due to supply chain challenges. In American Eagle Outfitters’ case, the company has paid extra to fly in its merchandise, which has temporarily weakened its gross margin. If the U.S. economy enters a recession — as a reminder, first-quarter U.S. gross domestic product came in at minus 1.4% — retailers will undoubtedly be pinched.

Then again, American Eagle Outfitters has demonstrated time and again that it’s a far better-run retailer than most. For example, merchandise that isn’t selling is quickly moved to ensure that popular items are purchased at or near full price. Minimizing discounting has been one of the company’s keys to maintaining such a robust dividend (nearly 4.8% yield).

As I’ve previously pointed out, American Eagle’s price point is also spot on. It’s not too low to cheapen the value of its brand (ahem, Aeropostale), or too high that it breaks the budgets of teens, parents, and young adults (ahem, Abercrombie & Fitch).

But the real key to American Eagle Outfitters returning to $35 a share is going to be Aerie. Annual sales for Aerie have grown by 72% since the end of 2019, and AE’s management has responded by opening new Aerie locations. When coupled with investments in direct-to-consumer sales, Aerie has the potential to sustain double-digit revenue growth for years to come.

To keep with the theme, I doubt $35 is a realistic price target within 12 months. However, $35 is a perfectly reasonable expectation at some point in the future.