On Friday, October 5, Steve Smith, a contributor at Minyanville, wrote a very compelling article about the Real Estate Investment Trust (REIT) sector. His article entitled "Mortgage REITs Are Wrong" highlighted the fact that "a few things have changed over the past year that negatively alter the outlook for the returns, and therefore negatively alter the outlook for the share prices" of many of the well-known Mortgage REIT names. One of the biggest things that have been a contributing factor toward such a negative outlook is clearly the behavior by which several of these firms have cut their dividends over the last 24 months.
Dividend Cuts Make Investors Unhappy
When an income-driven investor looks up a stock quote, one of the first things they see is the yield of that stock. Traditionally speaking, some of the most popular names within the Mortgage REIT sector carry some of the highest yields the market has to offer. As of Friday's close four of the highest-yielding mortgage REITs were: American Capital Agency (AGNC) which currently yields 14.30% ($5.00), Armour Residential REIT (ARR) which currently yields $14.10% ($1.08), Chimera Investment Corp. (CIM) which currently yields 13.20%, and Annaly Capital Management (NLY) which currently yields 12.10% ($2.00). Since September 2010, the dividend behavior of these four Mortgage REITs is as follows:
- -American Capital Agency has reduced its dividend only once in the last 24 months. The company paid a dividend of $1.40/share on September 24th 2010 and on September 19th 2012 managed to only pay a dividend of $1.25/share. If we examine the numbers closer we can see that a total cut of $0.15/share or 10.71% has taken place.
- -Armour Residential has reduced its dividend four times in the last 24 months. The company paid a dividend of $0.36/share on September 21st 2010 and on September 12th 2012 managed to only pay a dividend of $0.10/share. If we examine the numbers closer we can see that a total cut of $0.06/share or 16.66% has taken place.
- -Chimera Investment has reduced its dividend five times in the last 24 months. The company paid a dividend of $0.18/share on September 30th 2010 and on September 27th 2012 managed to only pay a dividend of $0.09/share. If we examine the numbers closer we can see that a total cut of $0.09/share or 50.00% has taken place.
- -Annaly Capital has reduced its dividend six times in the last 24 months. The company paid a dividend of $0.68/share on September 30th 2010 and on September 27th 2012 managed to only pay a dividend of $0.50/share. If we examine the numbers closer we can see that a total cut of $0.18/share or 26.47% has taken place.
One of the things that a dividend yield doesn't tell any potential investor is the amount by which the dividend has been cut over a certain amount of time. In this instance, it certainly doesn't highlight the number of times each of the above mentioned Mortgage REITs have cut their dividends. If potential investors were more aware of the size of these cuts over time, they'd be less likely to find such yields attractive.
In my opinion, the dividend yields of the Mortgage REIT sector are similar to the legendary story of the forbidden fruit. These companies may in fact look quite ripe for the picking based on the 13% and 14% yields that are associated with their dividends, but they aren't telling the whole story, and that my friends is a key catalyst for any potential investor looking to establish a position in the sector.