3 Dividend Yields Over 10%

Summary

  • 2 of these picks come directly from my portfolio.
  • Discounts to book value this large have historically been a sign of big gains for new buyers.
  • Large discounts to book value are enabling higher dividend yield as the company’s equity value is much higher than share prices.
  • The company is investing and leveraging the book value, so having more book value makes it easier to generate to net interest income.
  • I'm actually going to say something nice about a BDC I've rarely praised.
  • Looking for more investing ideas like this one? Get them exclusively at The REIT Forum. Learn More »
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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.

In this article I want to help investors with an understanding how to pick between similar shares. However, first I know investors are going to want a handful of picks for shares that are currently looking pretty cheap. The NAV estimates I’m referencing when we highlight these picks are our estimates from late June, but they aren’t reflecting the very end of the quarter. We take a little extra time to really drill in on the end-of-quarter values as part of our process for preparing for the earnings announcements.

Note: Prices are as of the July 4th weekend. On 7/5/2022 price movements were relatively small and do not change our outlook on any of these stocks. The three shares we mentioned all rallied, but it was only 2.33% for MFA and less than 1% for the two BDCs.

PSEC

Prospect Capital (PSEC) is one of the higher-risk BDCs in our view, but it is cheap enough to be attractive. Shares trade at a price-to-NAV ratio of about .67 and a dividend yield of 10.3%. The BDC has gone in and out of favor with investors over the years. That resulted in some swings in the price-to-book ratio, but .67 is low enough to give investors some upside to go along with the yield. What about buying PSEC when the price-to-book ratio is high and just hoping for the best? I hate that idea. No. The risk/reward is only attractive at a big discount. Let’s look at the historical range for price-to-trailing book value:

Prospect Capital price-to-book ratio charted for the last 10 years

The REIT Forum

Does it make sense now? Is anyone still confused about the idea? Let me simplify it. Paying less than 70% of book value leads to gains. Paying around 90% of book value or more leads to much weaker returns. When shares travel from a .70x to a .90x ratio, assuming no change in book value, the share price would increase by 28%. That’s a BIG increase to returns.

Some investors believe a falling share price indicates that book value is about to plunge. While plunging book value is one factor that can cause a share price to plunge, it sure hasn’t been a good theory here:

Prospect Capital book value and share price over the last decade

The REIT Forum

Share prices simply have not been a great predictor of future book value. However, book value has been pretty effective at indicating a ceiling for share prices.

SLRC

SLR Investment Corp. (SLRC) trades at a higher ratio, about .79 using our estimates. However, it carries a 10.9% dividend yield, and we find shares quite attractive at this valuation. They carry a bit less risk, which merits a higher price-to-NAV ratio. In SLRC’s case, a .79 ratio is quite attractive.

As you can see from this chart, over the last 6 years SLRC usually traded at a higher price-to-book ratio than PSEC:

Prospect Capital and SLR Investment Corporation compared using price to net asset value

The REIT Forum

The current ratio is almost the lowest it has gone outside of March and April 2020.

MFA

MFA Financial (MFA) also gets a quick reference. Price-to-estimated-book is around .66. That’s higher than the .62 price-to-trailing book value. Since both formulas use the same share price, you can tell that our estimate for book value is clearly down on the quarter. To be clear, we are estimating declines in book value during Q2 2022 for most of the mortgage REITs. This was another hard quarter for the fundamentals, but it wasn’t as bad for the fundamentals as it was for the share prices.

As of preparing this article, the major mortgage REIT ETFs are down about 20% year-to-date with about 75% of that decline occurring in Q2 2022 (April and June specifically). While we are projecting declines in BV, the projected declines are generally smaller than the price declines. That’s important because it means a much lower price-to-book ratio.

Why are BVs down? Part of the hit to book value simply comes from rates moving higher quickly, but we also some widening of spreads. That’s very favorable for reinvesting and it gives the mortgage REITs a much better position for performing on book value in the second half of the year. Ironically, when spreads are already wide and mortgage REITs can earn more from each dollar of book value, the price-to-book ratio is often lower. When spreads are tight, investors tend to pile in and push price-to-book ratios up too high. That’s why you can see such a large swing in the valuation.

Due to MFA trading at such a large discount to projected NAV, shares carry a 15.8% dividend yield. That’s absurdly high. However, the same dividend rate only represents a 10.5% yield on book value, which isn’t uncommon. You can’t expect a mortgage REIT to earn 15.8% on book value. However, doing around 10% to 11% is much more reasonable. That’s part of why the difference between share price and book value is so important.

For anyone who reads that as "close your eyes and buy the biggest yield", go dollar cost average into an index. I am absolutely not advocating chasing yields. We approach these positions with careful due diligence, which is critical to our record of success.

The rest of the charts in this article may be self-explanatory to some investors. However, if you’d like to know more about them, you’re encouraged to see our notes for the series.

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

Residential Agency

Residential Hybrid

Residential Originator and Servicer

Commercial

BDC

AGNC

CIM

PMT

BXMT

MAIN

NLY

EFC

NRZ

GPMT

TSLX

DX

NYMT

WMC

NEWT

ORC

MFA

RC

ARCC

ARR

MITT

GAIN

CHMI

GBDC

TWO

SLRC

IVR

ORCC

AAIC

TCPC

EARN

PFLT

OCSL

AINV

FSK

PSEC

Let the images begin!

Residential Mortgage REIT Charts

Note: The chart for our public articles uses the book value per share from the latest earnings release. Current estimated book value per share is used in reaching our targets and trading decisions. It is available in our service, but those estimates are not included in the charts below.

Residential mortgage REIT price to book ratio chart

The REIT Forum

Residential mortgage REIT dividend yield chart

The REIT Forum

Residential mortgage REIT earnings yield chart

The REIT Forum

Commercial Mortgage REIT Charts

Commercial mortgage REIT price to book ratio chart

The REIT Forum

Commercial mortgage REIT dividend yield chart

The REIT Forum

Commercial mortgage REIT earnings yield chart

The REIT Forum

BDC Charts

BDC price to book ratio chart

The REIT Forum

BDC dividend yield chart

The REIT Forum

BDC earnings yield chart

The REIT Forum

Preferred Share Charts

Preferred share price comparison chart

The REIT Forum

Preferred share stripped yield comparison chart

The REIT Forum

Preferred share floating yield comparison chart

The REIT Forum

preferred share price comparison for higher risk shares

The REIT Forum

preferred share stripped yield comparison for higher risk shares

The REIT Forum

preferred share floating yield comparison for higher risk shares

The REIT Forum

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

AGNCM

$20.23

FTF

8.50%

6.88%

8.19%

4/15/2024

$7.78

AGNCM

Prospectus

AGNCN

$22.80

FTF

7.68%

7.00%

8.12%

10/15/2022

$2.64

AGNCN

Prospectus

AGNCO

$21.69

FTF

7.50%

6.50%

8.40%

10/15/2024

$6.97

AGNCO

Prospectus

AGNCP

$20.34

FTF

7.53%

6.13%

8.60%

4/15/2025

$8.88

AGNCP

Prospectus

NLY-F

$22.56

FTF

7.76%

6.95%

8.13%

9/30/2022

$2.88

NLY-F

Prospectus

NLY-G

$20.40

FTF

8.02%

6.50%

7.98%

3/31/2023

$5.82

NLY-G

Prospectus

NLY-I

$21.96

FTF

7.74%

6.75%

8.35%

6/30/2024

$6.42

NLY-I

Prospectus

ARR-C

$20.99

8.37%

7.00%

8.37%

1/28/2025

$8.54

ARR-C

Prospectus

DX-C

$22.15

FTF

7.79%

6.90%

8.76%

4/15/2025

$7.59

DX-C

Prospectus

FBRT-E

$20.79

9.03%

7.50%

9.03%

7/12/2022

$4.19

FBRT-E

Prospectus

EFC-A

$21.55

FTF

7.84%

6.75%

8.70%

10/30/2024

$7.33

EFC-A

Prospectus

NRZ-A

$21.83

FTF

8.75%

7.50%

9.45%

8/15/2024

$7.40

NRZ-A

Prospectus

NRZ-B

$21.51

FTF

8.43%

7.13%

9.39%

8/15/2024

$7.51

NRZ-B

Prospectus

NRZ-C

$19.50

FTF

8.32%

6.38%

9.48%

2/15/2025

$9.90

NRZ-C

Prospectus

NRZ-D

$21.56

FTF

8.26%

7.00%

10.75%

11/15/2026

$11.33

NRZ-D

Prospectus

PMT-A

$21.90

FTF

9.35%

8.13%

9.35%

3/15/2024

$6.66

PMT-A

Prospectus

PMT-B

$22.54

FTF

8.95%

8.00%

9.26%

6/15/2024

$6.46

PMT-B

Prospectus

PMT-C

$19.10

8.91%

6.75%

8.91%

8/24/2026

$12.98

PMT-C

Prospectus

AIC

$24.40

Bond

6.96%

6.75%

6.96%

7/12/2022

$0.72

AIC

Prospectus

AAIN

$23.94

Bond

6.35%

6.00%

6.35%

8/1/2023

$2.93

AAIN

Prospectus

CIM-A

$21.43

9.41%

8.00%

9.41%

7/12/2022

$3.72

CIM-A

Prospectus

CIM-B

$21.31

FTF

9.47%

8.00%

9.57%

3/30/2024

$7.27

CIM-B

Prospectus

CIM-C

$19.90

FTF

9.82%

7.75%

8.92%

9/30/2025

$11.49

CIM-C

Prospectus

CIM-D

$20.57

FTF

9.81%

8.00%

9.41%

03/30/2024

$8.01

CIM-D

Prospectus

Second Batch:

Ticker

Price

BoF

S-Yield

Coupon

FYoP

NCD

WCC

QO Link

P-Link

TWO-A

$22.70

FTF

9.13%

8.13%

8.94%

04/27/2027

$12.46

TWO-A

Prospectus

TWO-B

$21.58

FTF

9.01%

7.63%

9.04%

07/27/2027

$13.43

TWO-B

Prospectus

TWO-C

$20.93

FTF

8.83%

7.25%

8.90%

1/27/2025

$9.06

TWO-C

Prospectus

MFA-B

$19.73

9.59%

7.50%

9.59%

7/12/2022

$5.34

MFA-B

Prospectus

MFA-C

$18.38

FTF

8.91%

6.50%

10.47%

3/31/2025

$11.10

MFA-C

Prospectus

GPMT-A

$21.27

FTF

8.23%

7.00%

9.55%

11/30/2026

$11.38

GPMT-A

Prospectus

CHMI-A

$22.30

9.20%

8.20%

9.20%

8/17/2022

$2.80

CHMI-A

Prospectus

CHMI-B

$22.95

FTF

9.00%

8.25%

8.64%

4/15/2024

$5.59

CHMI-B

Prospectus

IVR-B

$21.00

FTF

9.30%

7.75%

8.97%

12/27/2024

$8.87

IVR-B

Prospectus

IVR-C

$21.05

FTF

8.98%

7.50%

9.07%

9/27/2027

$13.82

IVR-C

Prospectus

NYMTM

$20.35

FTF

9.68%

7.88%

10.72%

1/15/2025

$9.57

NYMTM

Prospectus

NYMTN

$19.93

FTF

10.04%

8.00%

10.03%

10/15/2027

$15.57

NYMTN

Prospectus

NYMTL

$20.49

FTF

8.39%

6.88%

10.28%

10/15/2026

$11.81

NYMTL

Prospectus

NYMTZ

$18.85

9.29%

7.00%

9.29%

1/15/2027

$14.03

NYMTZ

Prospectus

AAIC-B

$21.00

8.37%

7.00%

8.37%

7/12/2022

$3.99

AAIC-B

Prospectus

AAIC-C

$21.99

FTF

9.43%

8.25%

9.09%

3/30/2024

$6.54

AAIC-C

Prospectus

MITT-A

$19.25

10.83%

8.25%

10.83%

7/12/2022

$5.87

MITT-A

Prospectus

MITT-B

$19.20

10.53%

8.00%

10.53%

7/12/2022

$5.91

MITT-B

Prospectus

MITT-C

$19.85

FTF

10.18%

8.00%

11.16%

9/17/2024

$9.64

MITT-C

Prospectus

ACR-C

$20.25

FTF

10.66%

8.63%

10.16%

7/30/2024

$9.07

ACR-C

Prospectus

ACR-D

$19.31

10.20%

7.88%

10.20%

5/21/2026

$13.19

ACR-D

Prospectus

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:

  1. Prices are inefficient.
  2. Long-term, share prices generally revolve around book value.
  3. Short-term, price-to-book ratios can deviate materially.
  4. 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:

Chart showing the performance of the best service on Seeking Alpha compared to four ETFs for dividend investors

The REIT Forum

The 4 ETFs we use for comparison are:

Ticker

Exposure

MORT

One of the largest mortgage REIT ETFs

PFF

One of the largest preferred share ETFs

VNQ

Largest equity REIT ETF

KBWY

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.

Ratings:

  • Bullish on PSEC, SLRC, and MFA

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This article was written by

Author of The REIT Forum
The #1 REIT Service For Those Targeting Strong Total Returns
You want to be on The REIT Forum because it is the #1 REIT research service on Seeking Alpha measured by returns. Period. See our Tipranks page. How did we get there? We did a better job of managing risk and discovering opportunities. We didn’t jump into trashy high-yield equity REITs with the rest of the crowd. We cover securities for trading and securities for the buy-and-hold investor. We are clear about the difference and that enabled us to perform better since inception and better in 2020.


Securities for the buy-and-hold investor generally carry much lower risk. If we enter a high-risk position, we plan to capitalize on a change in the valuation. We monitor those positions very carefully, rather than hoping everything turns out well over the next several years. That’s why we have so few losses in our investing.


We post our portfolio for you. You also get real-time alerts on every trade we place. Our reasoning for placing a trade is explained in clear English. You can even see the exact trades with the images we include from our stock accounts. We don’t offer you several different “portfolios”, instead, we show you exactly what we own, when we bought it, and how we are doing in that position. We make it simple for investors to follow our strategy.


You’ll find several reports on The REIT Forum that don’t get posted to the public side of Seeking Alpha. Many of our public reports are dramatically reduced versions of subscriber articles. If you enjoy our public articles, you’ll love the content we keep for subscribers.


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Disclosure: I/we have a beneficial long position in the shares of AGNCO, CIM-A, ARR-C, DX-C, NRZ-D, AGNCP, MFA-C, NYMTZ, NYMTL, MFA-B, NLY-G, NRZ, SLRC, AAIC, PMT, MFA, GPMT, RC 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.

Additional disclosure: Colorado Wealth Management Fund and Scott Kennedy are supporting contributors for The REIT Forum. Our ratings and outlooks will often overlap.
Any recommendation posted in this article is not indefinite. We closely monitor all of our positions. We issue Buy and Sell alerts on our recommendations, which are exclusive to our members.
I have an indirect conflict of interest with ABR and STWD. Neither I, nor any contributor for The REIT Forum, will provide investment advice, reply to questions, or engage in discussions regarding these two mREIT stocks.

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