Seeking Alpha

Reliable REIT Dogs Show Cash To Cover September Dividends

by: Fredrik Arnold

Twenty-one of 50 top yield REITs reported free cash flow yield exceeding dividend yield. That's sufficient margin to pay promised dividends (but REIT dividends are profits shed to save taxes).

Top 10 top cash margins as of 9/13/16 were from WMC; NYMT; AGNC; IVR; CLDT CMO; RAS; CLNY; PMT; with DX tops. Their margins of cash over dividend ranged 4.69%-47.75%.

Broker targets revealed ten top yield REITs that promise 19.32% more gain from $5k invested in all ten than from $5K invested in just the lowest priced five.

The Dividend Dogs Rule

The "dog" moniker was earned by stocks exhibiting three traits: (1) paying reliable, repeating dividends, (2) their prices fell to where (3) yield (dividend/price) grew higher than their peers. Thus, the highest yielding stocks in any collection became known as "dogs."

Why REITs?

These financial investment products are built to share the income from the development, management and financing real estate. Everything from residential units to factories, offices, storage facilities, timberlands, corporate campuses, grocery stores, and service stations are assembled in industry-specific Real Estate Investment Trusts. These potent financial entities recently were assigned their own real estate GICS classification as of September 1 and no longer reside in the financial sector. Their dividends and attractive return, however come with a price. By nature of their federal tax structures, REITs must distribute at least 90 percent of taxable income as dividends to investors. Thus the investor pays the taxes on REIT profits.

Dogcatching REITs by Yield

Top REIT dogs from seven YChart categories were ranked by yield. The chart below shows 50 from the YChart listing of 367 worldwide REITs. However, Wikipedia claims there were 456 as of June, 2014.

Periodic Safety Inspection

A previous article discussed the attributes of the collection of 50 highest yield REIT stocks from which these twenty-one that passed the dividend "stress" test were selected. These eighteen dogs report sufficient annual cash flow yield to cover their anticipated annual dividend yield. The margin of excess is shown in the last column. Financial guarantees however are easily over-ruled by a cranky board of directors or company policy canceling or varying the payout of dividends to shareholders. For example, Western Asset Mortgage (NYSE:WMC) on the list below has cut their dividend the past four quarters, despite strong cash flow. Also a stalwart and "safe" residential mortgage REIT, American Capital Agency Corp. (NASDAQ:AGNC) as recently as August 2016 cut its monthly profit-sharing "dividends" from $.20 to $.18. Just as they did in May, 2015 when their dividend dropped from $.22 to $.20.

21 "Reliable" REITs Have Cash Margins to Cover Dividends

Dog Metrics Uncovered Bargains From Top Yield REITs

Ten best safe-margin REITs that showed the biggest margins September 13 per YChart data, represented only the residential, diversified and hotel-motel industries of 7 YChart categories. Thus, the top ten of 21 reliable REITs ranked themselves by safety margin as follows:

Actionable Conclusions: (1) Analysts Predicted 5 Lowest Priced Safe Ten High Yield Sector Leader Dogs To Deliver 12.7% VS. (2) 17.7% Net Gains from All Ten by September, 2017

$5000 invested as $1k in each of the five lowest priced stocks in the safe ten REIT kennel by margin were determined by analyst 1 year targets to deliver 19.32% LESS net gain than $5,000 invested as $.5k in all ten. The eighth lowest priced safe REIT dog, Colony Capital (NYSE:CLNY), was projected to deliver the best net gain of 31.79%. In this case, analysts apparently say your best strategy is to put your $5K in the high priced five.

Lowest priced five safe REIT dogs as of September 13 were: RAIT Financial Trust (RAS); New York Mortgage Trust (NASDAQ:NYMT); Dynex Capital (NYSE:DX); Capstead Mortgage (NYSE:CMO); Western Asset Mortgage , with prices ranging from $3.06 to $10.33.

Higher priced five Safe REIT dogs for September 13 were:PennyMac Mortgage Investment (NYSE:PMT); Invesco Mortgage Capital (NYSE:IVR); Colony Capital ; Chatham Lodging Trust (NYSE:CLDT); American Capital Agency , whose prices ranged from $14.97 to $19.18.

This distinction between five low priced dividend dogs and the general field of ten reflects the "basic method" Michael B. O'Higgins employed for beating the Dow. The added scale of projected gains based on analyst targets contributed a unique element of "market sentiment" gauging upside potential. It provided a here and now equivalent of waiting a year to find out what might happen in the market. Its also the work analysts got paid big bucks to do.

A caution is advised, however, as analysts are historically 20% to 80% accurate on the direction of change and about 0% to 20% accurate on the degree of the change.

The net gain estimates mentioned above did not factor-in any foreign or domestic tax problems resulting from distributions. Consult your tax advisor regarding the source and consequences of "dividends" from any investment.

See my instablog for specific instructions about how to best apply the dividend dog data featured in this article.--Fredrik Arnold

Stocks listed above were suggested only as possible starting points for your "safest" REIT dog dividend stock purchase research process. These were not recommendations.

Four of these REIT dividend dogs qualify as valuable catches! They are listed with the now 52 Dogs Of The Week (DOTW) found on The Dividend Dog Catcher premium site. Click here to subscribe or get more information.

A top performing DOTW dog for the first quarter has been named. A second quarterly winner was discovered May 13. The third quarter top gaining dog was announced August 22.

For a free copy of both previous quarterly reports Q1 and Q2 and analysis of the new winning Arnold the Q3 pick, send your e-mail address, ticker symbol for your favorite dividend stock, and name of your favorite team of any sport or activity to: Remember: E-mail, ticker, team!

Disclaimer: This article is for informational and educational purposes only and should not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security. Prices and returns on equities in this article except as noted are listed without consideration of fees, commissions, taxes, penalties, or interest payable due to purchasing, holding, or selling same.

Graphs and charts were compiled by Rydlun & Co., LLC from data derived from ycharts. com;; analyst mean target price by Thomson/First Call in Yahoo Finance. Money dog photo:

Disclosure: I am/we are long ARR. 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.