This 12% Yielder Is A Dividend Powerhouse

| About: Apollo Commercial (ARI)

Summary

Apollo Commercial Real Estate Finance is an interesting high-yield income vehicle.

Apollo has increased its dividend by 15 percent last year.

The REIT's (adjusted) operating earnings cover its dividend.

An investment in ARI yields 11.51 percent.

I invest largely in dividend-paying stocks, including high-yield stocks that have yields of 7 percent or more. Last year I kicked off an article series about building a $100,000 high-yield income portfolio. In February last year I bought business development company Prospect Capital Corporation (NASDAQ:PSEC) and mortgage investment company New Residential Investment Corporation (NYSE:NRZ), largely because both companies seemed undervalued, and they come with a very nice dividend yield in excess of 10 percent.

I have added Starwood Property Trust (NYSE:STWD) to my shortlist for this portfolio because the company produces high-quality earnings, covers its dividend with core earnings, and has a yield larger than 9 percent. Though Starwood Property Trust's shares have rebounded quite a bit from February lows, they have gained ~24 percent, Starwood Property Trust continues make a compelling investment proposition, 'Starwood Property Trust: Why Not Buy This High Quality 9% Yielder For An Income Portfolio?'.

While I do like Starwood Property Trust (a lot), there is another commercial real estate debt provider that is worthy of serious consideration: Apollo Commercial Real Estate Finance (NYSE:ARI).

Apollo Commercial Real Estate Finance invests in first mortgage loans, subordinate loans, and commercial mortgage-backed securities, and is therefore a classic CRE investment vehicle.

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Source: Apollo Commercial Real Estate Finance Investor Presentation

Portfolio Diversification

Apollo Commercial Real Estate Finance is diversified geographically, lowering the REIT's risk to be affected by a downturn in the local economy in some parts of the country. Apollo's international exposure accounts for 18 percent, hedging the REIT's exposure to the U.S. CRE market.

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Source: Apollo Commercial Real Estate Finance Investor Presentation

Positive Interest Rate Sensitivity

Higher interest rates are a concern for many income investors.

Apollo Commercial Real Estate Finance is well positioned to deal with an increase in the prime rate due to its positive interest rate exposure. A raise in the prime interest rate is expected to have the following positive effects on the REIT's Net Interest Income:

Source: Apollo Commercial Real Estate Finance Investor Presentation

Compelling Yield And Dividend CRE play

Apollo Commercial Real Estate Finance has grown its dividend 15 percent last year, which is an impressive rate for any income vehicle, but especially in the high-yield sector.

Apollo's dividend increase was backed by strong operating earnings growth.

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Source: Apollo Commercial Real Estate Finance Investor Presentation

Apollo Commercial Real Estate Finance's adjusted operating earnings for the 1st quarter were $0.51/share, covering the REIT's dividend payout of $0.46/share. On a run-rate basis, Apollo is on track to pay shareholders $1.84/share. As a result, an investment in Apollo Commercial Real Estate Finance yields 11.51 percent.

Your Takeaway

Commercial real estate investment trusts make for compelling income investments, especially if, as is the case with Apollo Commercial Real Estate Finance the company raised its dividend 15 percent and still covers its dividend with operating earnings. Taking into a account that Apollo Commercial Real Estate Finance is already a high-yield stock, the dividend raise is even more impressive. An investment in Apollo yields almost 12 percent at the time of writing. Buy for income.

Disclosure: I am/we are long STWD, NRZ, PSEC.

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.