Here Is Why I Am Going To Double Down On 16% Yielding New Residential Investment Again

| About: New Residential (NRZ)

Summary

New Residential is the most undervalued high-yield stock on the Street, IMO.

New Residential sells below accounting book value, and has strong core earnings that cover the dividend.

New Residential announced an unchanged Q1-16 dividend of $0.46/share last week.

An investment in NRZ yields ~16 percent.

New Residential Investment Corporation (NYSE:NRZ) is my top high-yield stock pick for 2016 and beyond. The mortgage investment brings a lot of the things I like about an income vehicle to the table: New Residential is cheap on both an accounting book value and run-rate core earnings basis, the company covers its dividend with core earnings, yields a whopping ~16 percent, and has a good shot at growing its dividend in 2016 if core earnings simply flat-line.

So, what's not to like?

A year ago I bought a substantial position in New Residential Investment Corp. for my $100,000 high-yield income portfolio, or HYIP.

The high-yield income portfolio is essentially an investing experiment on my part to see if sustainable, or even growing, dividend income can be realized from a diversified portfolio of high-yield stocks. If you haven't read the NRZ article of my $100,000 HYIP article series yet, I'd suggest you start here.

I bought New Residential in February 2015, just before the company announced the acquisition of Home Loan Servicing Solutions, Ltd., and when the stock tumbled later this year, I doubled down on New Residential, buying another 260 shares. I now own 1,360 shares in my high-yield income portfolio with a weighted average price of $12.78, and a weighted average yield on cost of 14.40 percent.

Since New Residential changes hands for $11.51 at the time of writing, I am about 10 percent in the red on my investment. But that's not a reason for concern for me. In fact, quite the opposite is true: New Residential continues to sell below fair value (accounting book value of $12.13/share, ~5.5x P/run-rate core earnings), which is a good enough reason for me to double down on the mortgage investment company, and not to sell it.

No Dividend Hike In Q1-16, But That's No Problem At All

When New Residential reported record core earnings of $0.52/share for the fourth quarter, I inferred that the company would increase its dividend payout in the first quarter. Unfortunately, we know now that isn't true.

New Residential announced last week that it was holding its Q1-16 payout steady at $0.46/share. The dividend will be paid on April 29, 2016 to shareholders of record on April 4, 2016.

While I thought shareholders would see dividend growth in Q1-16, there is no reason to complain about a flat-lining dividend. Based on a $0.46/share quarterly, or $1.84/share annual dividend payout, NRZ yields ~16 percent. At the end of the day one cannot be upset about a 16 percent yielder that covers its dividend and sells for less than accounting book value. Further, I continue to see significant upside for New Residential in 2016 and beyond.

Your Takeaway

New Residential is in the bargain bin, there is no question about it. Though I (falsely) predicted that the mortgage investment company's excellent Q4-15 results would lead to a dividend hike in Q1-16, New Residential is still compelling with a flat-lining dividend, selling for a ~16 percent yield. I plan on doubling down on New Residential all throughout 2016 if the stock stays in the $10-$13 range. Buy for income and capital appreciation.

Disclosure: I am/we are long NRZ.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.