Dividend-Chopping Season

Summary

  • 18% Yield? Whacked to 13%. Notice a trend?
  • Read my stuff? You saw it coming. Some peers will still be looking to chop their dividends as well. Why do so many people buy blindly while claiming to invest?
  • Investors might close out their shorts now for a quick 10%, but "buying to close a short" is the only kind of reasonable buying. This still isn't a bargain.
  • Want to retire? Don't buy an 18% yield. You're just buying a dividend cut.
  • How about 5 alternatives? Sure, I'll toss in 5.
  • Looking for a portfolio of ideas like this one? Members of The REIT Forum get exclusive access to our model portfolio. Learn More »

An enraged troll strikes his enemy with his battle club. Fantasy Medieval Concept. A giant troll on a wild island. 3D Rendering.

Smash that dividend! Bash it! No more retirement for you!

designprojects/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.

Chop, chop, chop the dividend! That's what an orcish lumberjack does. They don't care about trees; they just chop dividends. Of course, I'm really talking about Orchid Island Capital (ORC).

A week ago, I wrote:

The amount a REIT paid out in dividends for the prior quarter doesn't tell you how much a share is worth. That's simply not how investing works. No, it's not. If you buy a sucker yield, that's on you. It's not on the board that reduced an obviously unsustainable dividend. It's on the investor who looked at the dividend yield and declared themselves the next Warren Buffett for coming up with an investing technique no other person had ever considered before. That sarcasm coming through clearly enough? You never know on the internet.

ORC demonstrated the wisdom of those words by chopping the dividend. Nearly 30% of that monthly dividend is already gone.

ORC dividend history

Seeking Alpha

Did you notice a trend in the chart? Something like "down and to the right"?

It wasn't the first time I suggested selling ORC. Or the second. Or the third. Look, I'm not going to count how many times we've suggested it because that because that would get really boring. I'll just remind you that I also recommended it on August 1st, 2022 in:

3 High Yielders to Dump After an Epic Rally

The three highlighted were ORC, ARR, and NLY.

Was a bearish rating on ORC for August 1st a good idea?

Price chart for ORC over the last month

Seeking Alpha

Sure, anytime something announces a dividend cut and is down about 10% from in a few weeks it was probably a good bearish rating.

Is ORC finally a coiled spring ready to shoot to the moon? No. I really don't think anyone reads my articles and wondered about that. On the plus side, they aren't so terrible now. Not a good deal, but part of the edge came off. Investors who hopped on the opportunity to short ORC might take their quick 10% and buy another security.

Will there be any other dividend cuts? Probably. Am I going to highlight all of them right now in a public article? No.

There are still a few that simply look too high. Is the market being intelligent about those risks? No. Being intelligent would mean prices falling before the cut is announced, rather than being shocked when the board makes the obvious decision. *Surprised Pikachu Face*. Sorry, no memes allowed directly in the article.

We can still see dividend yield impacting valuations as some investors hop in to support the share price so they can pretend they'll get paid the same dividend in the future. Want to retire? Don't do that.

Pretend dividends are only good for buying pretend food and pretend shelter.

Some Alternatives

What could investors buy instead? How about Rithm Capital Corp. (RITM). Formerly known by the better name of New Residential, RITM has dramatically better dividend coverage and a better (that means lower) price-to-book ratio.

I previously suggested DX as another alternative. believe it or not, even after ORC got slapped down for 8% in a day DX is still offering a better value. Yes, the dividend yield is still "lower," but DX comes with a better history of decision making.

If there is one lesson investors in this sector need to realize, it is that book value drives dividends. Investors who disregard book value are ignoring the amount of equity management has available to leverage into the model. That's why protecting book value is so important. Leverage can't go up to infinity. When book value gets wrecked, mortgage REITs need to reduce their assets to get leverage back under control. That means selling assets at the wrong time. Bad idea.

What could they do? Use less leverage, especially when the deck is stacked against them. That's not a popular strategy though, because several investors are busy staring at the highest yields in the sector. The ones that are lined up for the lumberjack to chop, chop, chop away.

Want more safety in your dividends? Check the preferred shares. AGNCM, AGNCO, and AGNCP are each offering attractive yields in the 7.15% to 7.9% range and all 3 are set to increase their dividends when the floating rates kick in. That depends on the future path of short-term interest rates, but if you're expecting rates to go lower there are plenty of great choices for fixed-rate dividends. I went over a few of them yesterday, so we can skip it this time.

That's 5 different shares in bold. Check them out and see what you think. Any of them still offers a better risk/reward profile.

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

RITM

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 / MFIC

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.

Note: The dividend yield for ORC is a mirage. It's already been slashed about 29%. Consequently, that 18.3% is more like 13%. Ouch.

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

$22.03

FTF

7.89%

6.88%

8.38%

4/15/2024

$5.99

AGNCM

Prospectus

AGNCN

$24.56

FTF

7.20%

7.00%

8.31%

10/15/2022

$0.88

AGNCN

Prospectus

AGNCO

$22.50

FTF

7.29%

6.50%

8.94%

10/15/2024

$6.17

AGNCO

Prospectus

AGNCP

$21.58

FTF

7.16%

6.13%

8.98%

4/15/2025

$7.64

AGNCP

Prospectus

NLY-F

$24.42

FTF

7.23%

6.95%

8.29%

9/30/2022

$1.02

NLY-F

Prospectus

NLY-G

$22.90

FTF

7.21%

6.50%

7.93%

3/31/2023

$3.32

NLY-G

Prospectus

NLY-I

$23.85

FTF

7.19%

6.75%

8.48%

6/30/2024

$4.53

NLY-I

Prospectus

ARR-C

$22.31

7.85%

7.00%

7.85%

1/28/2025

$6.93

ARR-C

Prospectus

DX-C

$23.61

FTF

7.38%

6.90%

9.02%

4/15/2025

$6.13

DX-C

Prospectus

FBRT-E

$21.60

8.79%

7.50%

8.79%

9/17/2022

$3.73

FBRT-E

Prospectus

EFC-A

$22.01

FTF

7.75%

6.75%

9.38%

10/30/2024

$6.87

EFC-A

Prospectus

RITM-A

$23.04

FTF

8.20%

7.50%

9.60%

8/15/2024

$5.73

RITM-A

Prospectus

RITM-B

$21.79

FTF

8.24%

7.13%

9.97%

8/15/2024

$6.79

RITM-B

Prospectus

RITM-C

$20.00

FTF

8.03%

6.38%

10.01%

2/15/2025

$9.00

RITM-C

Prospectus

RITM-D

$22.35

FTF

7.89%

7.00%

10.43%

11/15/2026

$10.11

RITM-D

Prospectus

PMT-A

$24.50

FTF

8.44%

8.13%

9.15%

3/15/2024

$4.06

PMT-A

Prospectus

PMT-B

$24.81

FTF

8.21%

8.00%

9.20%

6/15/2024

$4.20

PMT-B

Prospectus

PMT-C

$20.49

8.39%

6.75%

8.39%

8/24/2026

$11.59

PMT-C

Prospectus

AIC

$24.93

Bond

6.88%

6.75%

6.88%

9/17/2022

$0.51

AIC

Prospectus

AAIN

$23.98

Bond

6.29%

6.00%

6.29%

8/1/2023

$2.52

AAIN

Prospectus

CIM-A

$23.43

8.70%

8.00%

8.70%

9/17/2022

$2.09

CIM-A

Prospectus

CIM-B

$23.25

FTF

8.77%

8.00%

9.61%

3/30/2024

$5.34

CIM-B

Prospectus

CIM-C

$21.64

FTF

9.13%

7.75%

9.10%

9/30/2025

$9.75

CIM-C

Prospectus

CIM-D

$22.36

FTF

9.12%

8.00%

9.53%

03/30/2024

$6.23

CIM-D

Prospectus

Second Batch:

Ticker

Price

BoF

S-Yield

Coupon

FYoP

NCD

WCC

QO Link

P-Link

TWO-A

$23.80

FTF

8.61%

8.13%

9.15%

04/27/2027

$10.85

TWO-A

Prospectus

TWO-B

$22.39

FTF

8.59%

7.63%

9.38%

07/27/2027

$12.14

TWO-B

Prospectus

TWO-C

$21.78

FTF

8.40%

7.25%

9.25%

1/27/2025

$7.76

TWO-C

Prospectus

MFA-B

$22.25

8.59%

7.50%

8.59%

9/17/2022

$3.17

MFA-B

Prospectus

MFA-C

$20.55

FTF

8.05%

6.50%

10.30%

3/31/2025

$8.94

MFA-C

Prospectus

GPMT-A

$22.00

FTF

8.04%

7.00%

10.12%

11/30/2026

$10.65

GPMT-A

Prospectus

CHMI-A

$22.22

9.35%

8.20%

9.35%

9/17/2022

$3.06

CHMI-A

Prospectus

CHMI-B

$22.33

FTF

9.36%

8.25%

9.76%

4/15/2024

$6.21

CHMI-B

Prospectus

IVR-B

$21.91

FTF

9.01%

7.75%

9.49%

12/27/2024

$7.96

IVR-B

Prospectus

IVR-C

$21.50

FTF

8.89%

7.50%

9.79%

9/27/2027

$13.37

IVR-C

Prospectus

NYMTM

$23.40

FTF

8.51%

7.88%

10.17%

1/15/2025

$6.53

NYMTM

Prospectus

NYMTN

$21.85

FTF

9.27%

8.00%

10.05%

10/15/2027

$13.65

NYMTN

Prospectus

NYMTL

$20.61

FTF

8.44%

6.88%

11.17%

10/15/2026

$11.70

NYMTL

Prospectus

NYMTZ

$20.12

8.80%

7.00%

8.80%

1/15/2027

$12.76

NYMTZ

Prospectus

AAIC-B

$21.50

8.26%

7.00%

8.26%

9/17/2022

$3.81

AAIC-B

Prospectus

AAIC-C

$21.03

FTF

9.98%

8.25%

10.46%

3/30/2024

$7.50

AAIC-C

Prospectus

MITT-A

$20.76

10.17%

8.25%

10.17%

9/17/2022

$4.74

MITT-A

Prospectus

MITT-B

$19.91

10.28%

8.00%

10.28%

9/17/2022

$5.58

MITT-B

Prospectus

MITT-C

$20.20

FTF

10.13%

8.00%

11.97%

9/17/2024

$9.29

MITT-C

Prospectus

ACR-C

$21.90

FTF

9.98%

8.63%

10.30%

7/30/2024

$7.42

ACR-C

Prospectus

ACR-D

$21.90

9.10%

7.88%

9.10%

5/21/2026

$10.60

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 exchange-traded funds ("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.

Want to invest in better REITs? Stop buying trash and get access to the research that enabled us to make so many accurate calls.

Click the link to get your two-week trial

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.


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

Recommended For You

Comments (37)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.