My 2 Largest High Dividend Yields
Summary
- NRZ-D offers investors a very reasonable yield today with a solid floating spread after the rate resets in late 2026.
- We see NRZ-D being a more appealing share than the other preferred shares from NRZ, but the difference is pretty small.
- CIM-A is our other largest position. We expect shares to get called in the near future, but it can still be a useful place to park some cash.
- If shares of CIM-A are not called promptly, the quick dividend accrual at an 8% rate would be a nice benefit for investors.
- We don’t plan to cover CMO after the merger. We find it interesting that TWO has a higher projected price-to-book than NRZ or PMT.
- This idea was discussed in more depth with members of my private investing community, The REIT Forum. Learn More »
JuSun/iStock via Getty Images
Get ready for charts, images, and tables because they are better than words. The ratings and outlooks we highlight here come after Scott Kennedy's weekly updates in the REIT Forum. Your continued feedback is greatly appreciated, so please leave a comment with suggestions.
New Residential (NRZ) issued a new preferred share: NRZ-D (NYSE:NRZ.PD). Since the rate resets, we're grouping it in as a "fixed-to-floating" security. However, NRZ-D specifies the 5-year treasury rate rather than LIBOR as the measure to be used when the rate resets.
Target
Our current target buy-under price is $25.29. This price includes all adjustments (such as dividend accrual). That's convenient for investors because it means they don't need to make any adjustments. Initially, shares were trading around $24.74. It is common for a preferred share to start trading under call value as the underwriters look to sell millions of shares in a few days. It rallied a bit since then but is still pretty close to $25.00.
To evaluate NRZ-D, we want to compare it to some similar shares in the form of NRZ-A (NRZ.PA) and NRZ-B (NRZ.PB).
Comparison
Compared to NRZ-A and NRZ-B, NRZ-D will have an extra 27 months of call protection.
NRZ-D has a lower starting coupon rate than NRZ-A or NRZ-B, but the difference between NRZ-A's 7.5% and NRZ-D's 7.0% rate is only worth about $.375 in extra dividends prior to NRZ-A reaching the end of call protection and starting to float.
A quick comparison of the NRZ preferred shares is shown below:
Source: The REIT Forum
Due to the timing of issuance, NRZ-D won't reach 100% progress on the dividend before shares go ex-dividend. Instead, the first dividend will be for a shorter period and thus in a smaller amount. Shares began with $.14 in accrual because shares go ex-dividend about a month before the actual payment date and starting with $.14 will allow the shares to accumulate the right amount of dividend accrual (give or take $.01) by the ex-dividend date.
If the preferred shares are not called, NRZ-A would get a 5.802% floating spread (plus the short-term rates). That's the highest among the first 3 NRZ preferred shares.
NRZ-D would get 6.223% plus the 5-year Treasury rate. We find that spread more attractive (6.223% is bigger than 5.802% and we like the 5-year Treasury as a base), therefore we think NRZ-D would be more attractive than NRZ-A after both shares begin floating/resetting rates.
Other Recent Picks
Following the rally of the other picks we recently highlighted, PMT-C (PMT.PC) and NYMTL (NYMTL), NRZ-D was the only preferred share currently sitting in our target range. Consequently, it should be no surprise that we were interested in picking up shares.
Index Card
The latest index card is below:
Source: The REIT Forum
Other Notes
Capstead Mortgage (CMO) resides in our neutral range, only slightly below the "overpriced" range. Shares trade at a premium to book and investors seem excited about the pending merger.
Two Harbors (TWO) has a higher projected price-to-book ratio than New Residential (NRZ) or PennyMac Mortgage Trust (PMT). That seems silly.
CIM-A (CIM.PA) has a high probability of a call in the near term. We still own shares. If we saw a sufficient rally we would look to sell them or a sufficient dip we would be interested in buying more. We expect the price to stay in a pretty narrow band as the market should be aware that these shares will probably be called. Let's go into CIM-A a little more.
CIM Preferred Shares
We'll start with the index card:
Source: The REIT Forum
We provided the following note to subscribers while the market was open:
For investors comfortable with moderate risk and the liquidity constraints, some cash could be parked in CIM-A. Prices are unlikely to swing all too much (absent a major market event). We're estimating that if CIM announced a call for the earliest possible date, investors would collect about $25.16 in total. Shares are currently trading in the $25.09 to $25.12 range, so a call would still provide a slight reward. If shares aren't called promptly, the amount of cash due to the shareholder would increase gradually as the security has an 8% dividend rate (earning $.50 per quarter).
The premise here is that investors who enter around $25.12 or below would expect a minimum return of about $.04 with the *potential to get a bit more if the call doesn't happen right away*. Liquidity isn't great, so investors will be limited on position size. However, it could be a nice way to park a little cash for investors who simply have excess cash sitting on hand and don't mind the moderate risk level. If the call happens and investors only get $.04 per share, then it probably wasn't worth the time to place the trade. However, if the call was delayed for a month, then the investor would've earned another $.16 in a position where we expect volatility to be low.
I don't expect to be opening this trade currently because of the liquidity issues. Upon my trade alert, it would likely be near impossible for other subscribers to enter the position. That wouldn't fit with our goals (making our trades simple to follow), so I'm just passing this idea on to subscribers. If shares happen to still be available at this price in a day or two, then I might pick some up. However, with the significant call risk, it only makes sense if the price is below $25.16 and preferably a bit lower.
Two Largest High Dividend Yield Positions
We have only two positions with weights greater than 7.5% and yields greater than 6.9%. They are NRZ-D and CIM-A.
Each is playing a different role in our portfolio as CIM-A is likely to be called in the near future and NRZ-D still has call protection for several years. CIM-A is offering a high fixed-rate dividend yield today and NRZ-D will eventually switch over to a resetting rate. Despite some differences, they land as our two largest high-yield positions because each is offering us a reasonable tool for building our wealth over time.
We do have other positions weights over 7.5% or with yields above 6.9%, but no other positions meet both criteria.
Allocation
Our current allocation strategy still carries a bit of cash:
Source: The REIT Forum
If we consider that CIM-A is a large chunk of the "preferred shares" position, then we also need to be aware that our cash position could be increased materially as the position may be closed (either on a rally in the price or a call).
Stock Table
We will close out the rest of the article with the tables and charts we provide for readers to help them track the sector for both common shares and preferred shares.
We're including a quick table for the common shares that will be shown in our tables:
Type of REIT or BDC | ||||
Agency | Hybrid | Originator and Servicer | Commercial | BDC |
Let the images begin!
Residential Mortgage REIT Charts
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Source: The REIT Forum
Commercial Mortgage REIT Charts
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BDC Charts
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Notes on Price-to-Trailing Book Ratios - Using Q2 2021 Book Value
Remember that these are price-to-trailing-book ratios. They are not using estimates of current book value. Book values continue to change every day. Scott Kennedy provides frequent updates on estimated book value, ratings, and price targets through The REIT Forum.
Repeated Note: There are two points we need to highlight here:
- AG Mortgage Investment Trust - We are using the Q2 2021 book value reported by management and classified as "adjusted book value per share". Adjusted book value of $14.72 is lower than GAAP book value of $15.19.
- MFA Financial reports "GAAP book value" and "economic book value". We've chosen to use the GAAP book value to remain consistent. GAAP book value per share of $4.65 is lower than economic book value per share of $5.12.
Unfortunately, we have to repeat those bullet points every time we publish because it regularly comes up if we don't mention it.
Notes on Common Share Dividend Yield
Dividend yield often comes up in the comments, but picking based on dividend yield is stupid and regularly results in terrible performance. Don't do it.
This chart is still in the same order as the prior charts. Consequently, you know the highest price-to-book ratios (using trailing GAAP book value) for each segment will be at the top. If you see a mistake, please feel free to say something. Occasionally the data for dividend rates requires a manual update.
Notes on Earning Yields
One of the next things investors may ask about is the yield using core earnings. This chart puts together the core earnings based on the consensus analyst estimate. Beware that the consensus estimate may not always be the best estimate. Further, there are ways to increase "Core Earnings" through accounting decisions or modifying hedges. Consequently, investors should still take these values cautiously. We do not depend on the consensus estimate to make decisions.
Preferred Share Charts
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Notes on Preferred Share Prices
This chart gives you a pretty quick feel for which shares are trading at a discount to call value. Each of these preferred shares has a call value of $25.00, but that doesn't mean a share will be called. The company decides if they want to issue a call or not.
Notes on Dividend Yield / Stripped Yield
Stripped yields are vastly more useful than "current" yields for preferred shares. The stripped yield uses the stripped price. That's different from using the current price because it means we already adjusted for dividend accrual. This makes the process easier for investors.
We can talk about shares using "regular prices". Those are the prices an investor would actually use when entering an order.
However, we will provide the stripped yield to adjust for the dividend accrual. In the spreadsheets we host for our marketplace forum, we include the actual ex-dividend date, or the projected ex-dividend date if the actual date isn't yet known. If you're planning to buy a share, it's always wise to check if the shares just went ex-dividend so you can adjust your targets accordingly.
Notes on Floating Yield on Price
Since many of these shares switch over to floating rates, we also want to consider what the yield would be if the floating rate was in effect and shares were still at the current price. To demonstrate that, we use the "Floating Yield On Price". If the share remains at a fixed-rate indefinitely, then the value doesn't change.
One point we need to emphasize here is that we are dealing with yields. A yield must involve the share price. We aren't simply showing the new "rate" if the share began floating, we are adjusting the new rate for the stripped price.
Floor
ACR-C has a floor that interferes with the eventual floating rate. The floor prevents the floating rate from being less than the initial fixed-rate. Consequently, while ACR-C is one of the FTF shares, it doesn't exhibit the same decrease as other FTF shares when we switch over to the "Floating Yield on Price". However, it remains a higher-risk share because of the type of assets the REIT owns.
Called
AIW, IVR-A, and NYMTO were called. They are no longer in the charts or tables. We've added NRZ-D, AAIN, NYMTL, PMT-C, and ACR-D to the tables.
Preferred Share Data
Beyond the charts, we're also providing our readers with access to several other metrics for the preferred shares.
After testing out a series on preferred shares, we decided to try merging it into the series on common shares. After all, we are still talking about positions in mortgage REITs. We don't have any desire to cover preferred shares without cumulative dividends, so any preferred shares you see in our column will have cumulative dividends. You can verify that by using Quantum Online. We've included the links in the table below.
To better organize the table, we needed to abbreviate column names as follows:
- Price = Recent Share Price - Shown in Charts
- BoF = Bond or FTF (Fixed-to-Floating)
- S-Yield = Stripped Yield - Shown in Charts
- Coupon = Initial Fixed-Rate Coupon
- FYoP = Floating Yield on Price - Shown in Charts
- NCD = Next Call Date (the soonest shares could be called)
- Note: For all FTF issues, the floating rate would start on NCD.
- WCC = Worst Cash to Call (lowest net cash return possible from a call)
- QO Link = Link to Quantum Online Page
Ticker | Price | BoF | S-Yield | Coupon | FYoP | NCD | WCC | QO Link | P-Link |
$25.63 | FTF | 6.71% | 6.88% | 4.35% | 4/15/2024 | $3.67 | |||
$25.94 | FTF | 6.75% | 7.00% | 5.05% | 10/15/2022 | $0.81 | |||
$25.54 | FTF | 6.36% | 6.50% | 5.02% | 10/15/2024 | $4.34 | |||
$25.15 | FTF | 6.09% | 6.13% | 4.80% | 4/15/2025 | $5.21 | |||
$25.54 | FTF | 6.84% | 6.95% | 5.04% | 9/30/2022 | $1.20 | |||
$25.43 | FTF | 6.42% | 6.50% | 4.25% | 3/31/2023 | $2.00 | |||
$26.50 | FTF | 6.40% | 6.75% | 4.86% | 6/30/2024 | $3.14 | |||
$25.70 | 6.83% | 7.00% | 6.83% | 1/28/2025 | $5.13 | ||||
$25.62 | FTF | 6.73% | 6.90% | 5.46% | 4/15/2025 | $5.41 | |||
$25.00 | 7.50% | 7.50% | 7.50% | 10/25/2021 | $0.05 | ||||
$26.08 | FTF | 6.56% | 6.75% | 5.18% | 10/30/2024 | $4.41 | |||
$25.40 | FTF | 7.50% | 7.50% | 5.93% | 8/15/2024 | $5.24 | |||
$25.05 | FTF | 7.22% | 7.13% | 5.85% | 8/15/2024 | $5.31 | |||
$23.27 | FTF | 6.95% | 6.38% | 5.56% | 2/15/2025 | $7.33 | |||
$25.03 | FTF | 7.05% | 7.00% | 6.40% | 11/15/2026 | $9.01 | |||
$26.15 | FTF | 7.82% | 8.13% | 5.74% | 3/15/2024 | $3.92 | |||
$26.33 | FTF | 7.64% | 8.00% | 5.85% | 6/15/2024 | $4.17 | |||
$25.14 | 6.78% | 6.75% | 6.78% | 8/24/2026 | $8.30 | ||||
$25.23 | Bond | 6.73% | 6.75% | 6.73% | 10/25/2021 | -$0.06 | |||
$24.99 | Bond | 6.08% | 6.00% | 6.08% | 8/1/2023 | $3.00 | |||
$25.10 | 7.99% | 8.00% | 7.99% | 10/30/2021 | $0.06 | ||||
$25.44 | FTF | 7.89% | 8.00% | 5.84% | 3/30/2024 | $4.55 | |||
$25.38 | FTF | 7.66% | 7.75% | 4.82% | 9/30/2025 | $7.37 | |||
$25.32 | FTF | 7.92% | 8.00% | 5.46% | 03/30/2024 | $4.67 |
Second Batch:
Ticker | Price | BoF | S-Yield | Coupon | FYoP | NCD | WCC | QO Link | P-Link |
$26.65 | FTF | 7.76% | 8.13% | 5.53% | 04/27/2027 | $10.04 | |||
$25.84 | FTF | 7.50% | 7.63% | 5.40% | 07/27/2027 | $10.61 | |||
$25.22 | FTF | 7.31% | 7.25% | 5.18% | 1/27/2025 | $6.14 | |||
$25.91 | 7.91% | 8.20% | 7.91% | 8/17/2022 | $0.73 | ||||
$25.61 | FTF | 8.06% | 8.25% | 5.63% | 4/15/2024 | $4.47 | |||
$25.40 | FTF | 7.67% | 7.75% | 5.26% | 12/27/2024 | $5.92 | |||
$25.53 | FTF | 7.39% | 7.50% | 5.34% | 9/27/2027 | $10.74 | |||
$25.27 | FTF | 7.79% | 7.88% | 6.49% | 1/15/2025 | $6.13 | |||
$25.40 | FTF | 7.87% | 8.00% | 5.73% | 10/15/2027 | $11.59 | |||
$24.94 | FTF | 6.89% | 6.88% | 6.28% | 10/15/2026 | $8.65 | |||
$25.18 | 7.69% | 7.75% | 7.69% | 10/25/2021 | -$0.14 | ||||
$25.21 | 7.47% | 7.50% | 7.47% | 10/25/2021 | -$0.11 | ||||
$24.52 | FTF | 6.66% | 6.50% | 5.61% | 3/31/2025 | $6.15 | |||
$24.88 | 7.05% | 7.00% | 7.05% | 5/12/2022 | $1.12 | ||||
$25.27 | FTF | 8.19% | 8.25% | 5.75% | 3/30/2024 | $4.80 | |||
$25.70 | 8.08% | 8.25% | 8.08% | 10/25/2021 | -$0.53 | ||||
$24.89 | 8.09% | 8.00% | 8.09% | 10/25/2021 | $0.28 | ||||
$24.93 | FTF | 8.08% | 8.00% | 6.67% | 9/17/2024 | $6.04 | |||
$25.42 | FTF - Floor | 8.48% | 8.63% | 8.48% | 7/30/2024 | $5.51 | |||
$25.40 | 7.75% | 7.88% | 7.75% | 7/30/2024 | $5.01 |
There are a few things you should know at the start:
- When a share can be called on short notice, the annualized yield-to-call reaches absurd levels. Investors shouldn't put too much weight on it. On the other hand, a negative number can be a significant concern. Consequently, we decided to include it in the chart.
- We sort our spreadsheet for our marketplace forum by risk ratings within each sector. We decided to use the same technique for this series since it communicates more information to readers. You'll notice a general correlation where lower risk correlates with a higher price and lower yield, though this link isn't absolute.
- Worst Cash to Call example: Imagine a preferred share that could be called in a few months and would pay out a total of $.75 in dividends by that time. If an investment in those shares ends in a call, the smallest amount of cash inflows possible would be $25.00 (call value) plus $.75 (total dividends). If the share price was $25.60, then the "Worst Cash to Call" would be $.15. That comes from the following equation: $25.00 + $.75 - $25.60 = $.15. If the share price increased by $.20 in the next hour, the "Worst Cash to Call" would decline to negative $.05.
Strategy
Our goal is to maximize total returns. We achieve those most effectively by including "trading" strategies. We regularly trade positions in the mortgage REIT common shares and BDCs because:
- Prices are inefficient.
- Long-term, share prices generally revolve around book value.
- Short-term, price-to-book ratios can deviate materially.
- Book value isn't the only step in analysis, but it is the cornerstone.
We also allocate to preferred shares and equity REITs. We encourage buy-and-hold investors to consider using more preferred shares and equity REITs.
Performance
We compare our performance against 4 ETFs that investors might use for exposure to our sectors:
Source: The REIT Forum
The 4 ETFs we use for comparison are:
Ticker | Exposure |
One of the largest mortgage REIT ETFs | |
One of the largest preferred share ETFs | |
Largest equity REIT ETF | |
The high-yield equity REIT ETF. Yes, it has been dreadful. |
When investors think it isn't possible to earn solid returns in preferred shares or mortgage REITs, we politely disagree. The sector has plenty of opportunities, but investors still need to be wary of the risks. We can't simply reach for yield and hope for the best. When it comes to common shares, we need to be even more vigilant to protect our principal by regularly watching prices and updating estimates for book value and price targets.
Conclusion
NRZ-D is still offering a reasonably nice deal for investors. It carries a solid yield upfront and the eventual reset on the rate carries a significant spread which should make it more appealing than many other fixed-to-floating shares, especially when it trades right around $25.00. CIM-A is an interesting short-term play depending on the prices available for buying or selling the shares. Around $25.09 to $25.12 we certainly like the shares, but don't expect to get much. It's an opportunity to put some cash to work temporarily to get a little yield out of what would otherwise be idle cash.
We won't be following CMO after their merger is completed as the company will be focusing on a significantly different type of assets. There is nothing fundamentally wrong with the new REIT, it simply won't align as well with the shares we intend to cover. TWO's higher price-to-book ratio compared to NRZ and PMT seems strange and probably shouldn't be sustained.
Ratings:
- Bullish on preferred share: NRZ-D
- Neutral on CMO
- Not bothering to put a "rating" on CIM-A when we're expecting the shares to trade in a very tight range.
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Colorado Wealth Management is a REIT specialist who began his decades-long investment career in a family-owned realtor office before launching his own company and embracing his drive for deep-dive REIT analysis. He passed all 3 CFA exams. He focuses on Equity REITs, Mortgage REITs, and preferred shares.
Features of the group include: Exclusive REIT focus analysis, proprietary charts and data models, real-time trade alerts posted multiple times a month, multiple subscriber-only portfolios, and access to the service's team of analysts and support staff for dialogue and questions on the REIT space.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of AGNCO, CIM-A, ARR-C, CMO-E, DX-C, NRZ-D, NRZ, SLRC, DX, PMT either through stock ownership, options, or other derivatives. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (21)
Whatever floats your boat George
Me personally I'd rather book dividend income and retain all my shares for consistent income production
