Investors seeking high yield dividends have found a haven in REITs; with high yields of 12% or higher in some circumstances, the industry has been lucrative for investors. Inevitably, REITs cannot continue to offer high yields, so we'll take a look at 5 high yielding REITs and determine whether or not they can continue paying such appealing dividends.
Annaly Capital Management (NLY): Shares are currently trading midway between its 52 week low and high of $14.05 and $18.79 respectively. While trading in the range of $16.25, investors earn a 14.5% return from dividends alone. Annaly has a current market cap of $15.8 billion, making it one of the largest REITs on the market; nevertheless the company is anticipated to report a net loss for Fiscal year 2011, much of which is attributed to an unrealized net loss on investments. As of September 31st 2011, the company reported a net loss of $113.8 million (-0.14 per share), compared to a profit of $35 million (.06 per share) in 2010.
Despite the negative earnings, the company has grown revenue (interest income) 35% in the first nine months compared to the same periods in 2010, paired with a favorable market environment, the company is poised to continue to grow. Moreover, the company has amassed liquid assets, with almost $3.5 billion worth of cash and equivalents on its books. Recent dividend cuts may have some investors apprehensive and we suggest investors review key risks facing Annaly; however with cash per share of $5.04 per share, Annaly is sure to continue to paying a high dividend.
Chimera Investment Corporation (CIM): Chimera is a smaller REIT which is currently capitalized at $2.8 billion. Revenue for 2011 is already up 50% in the first three quarters of the year, and the company is anticipated to continue the trend in the fourth. In 2010 the company paid out $.69 cents a share, in 2011 dividends decreased to $.52 a share, however as share prices have fallen in correlation with the general market, the company continues to provide a high dividend yield of 16% and greater.
With a growth of cash and cash equivalents of 37% and stellar revenue growth, Chimera is guaranteed to continue paying high dividends.
Armour Residential REIT (ARR): Armour Residential is currently yielding 18.3% with an annual payout of $1.32 per share. With a market cap of $600 million, Armour is a small cap REIT, which entices investors with its impressive yield. In the quarter ended September 31st, the company reported a net loss of $34 billion, compared to a loss of $458 million at the same time in 2010. As profit margin continues to shrink, Armour is likely to slice its dividend.
Moreover, in 2010 the company had a payout ratio of 1.3; an indicator the current dividend policy is unsustainable, and the company may be too reliant on leverage to payout dividends.
American Capital Agency Corp (AGNC): American Capital is an extremely high yielding REIT, providing investors with 19.9% dividend yield; the company is currently capitalized at $6.3 billion. For the quarter ended September 2011, the company reported an interest income of $326.8 million a 520% increase from Q3 2010. YTD, income has increased 500% from the same time in 2010. Likewise, the company has grown Cash and Cash equivalents substantially; providing enough liquidity for further investment and additional growth.
Furthermore the company has managed to maintain a payout ratio which is less than its relatively high profit margins of 90% and greater. Unlike many of its competitors AGNC has not cut its dividend, instead the company has maintained an annual dividend of $5.60 since 2009. With cash per share of $6.75 per share, American Capital is sure to continue paying a high dividend yield to investors.
MFA Financial (MFA): Shares are currently trading just below $7 and yielding 14%. The company is currently capitalized at $2.5 billion, on par with Chimera. Though the company's cash and cash equivalents have grown 22%, the company's balance sheet has grown 38%, with Liabilities increasing by 50%. Moreover, profit margins have decreased from 69% in the first 9 months of 2010 to 64% in 2011. MFA currently pays out 102% of its profits as distributions so investors should keep an eye on this number. It is not worrisome, given that REITs typically sport payout ratios over 90% or greater as required by law, but numbers over 100% suggest that cash flows may see some difficulty with maintaining distributions in the long run.
Some investors have found high yield stock to be an advantageous investment strategy, as the yields provide a profitable alternative to low yielding savings and debt instruments. However, high yielding REITs are not as assured as the low risk investments.
As uncertainty in the credit market looms ahead of 2012, many REITs are slicing their distributions in a conservative effort to mitigate risk; consequently a simple dividend cut should not cause investors to flee. Instead investors should monitor revenue growth, rising expenses, leverage and liquidity. In today's market conditions numerous REITs are positioned to grow, however ensure your REIT has a history of dividend growth.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.