3 REITS That Could Be Yield Traps

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Investors seeking income are often attracted to high-yielding dividend stocks. With recent sell-offs on real estate investment trust (REIT) stocks, many of them now sport much higher yields than a year ago.

But many of these stocks are nothing more than yield traps or poorly performing stocks that are high risks for further downside or dividend cuts. Remember the adage that all that glitters is not gold. Here are three REIT stocks that could be yield traps.

Annaly Capital Management Inc. NLY is a mortgage REIT (mREIT) that invests in mortgage-backed securities to loan money on residential properties backed by Fannie Mae, Freddie Mac or Ginnie Mae. It is one of the most widely-known mREITs on Wall Street.

Annaly Capital Management has a reputation for being a volatile stock with a high beta of 1.35 (1.00 is on par with the general market) but has always paid income investors a very large dividend to compensate for that volatility.

On September 26, 2022, Annaly Capital Management initiated a 1-for-4 reverse stock split to boost its price, which had fallen below $6, but it has dropped almost another 25% since then. Investors are often wary of companies that do reverse stock splits.

The annual funds from operations (FFO) of $3.92 still covers the annual dividend of $3.52 and its 21% yield, but not by much. Also, the five-year dividend history shows a decline from $1.20 to $1.00 to $0.88 over that time. With the stock price still in a deep downtrend, investors should be cautious about the future dividend and overall performance of Annaly Capital Management.

Orchid Island Capital Inc. ORC is a specialty finance REIT that acquires, invests in and offers financing from U.S. residential mortgage-backed securities.

Over the last five years, Orchid Island Capital stock has lost more than 80% and the dividend has been cut several times. The last three quarters have seen negative earnings per share (EPS) and revenue.

On August 30, with the stock price below $3.00 and a dividend yield over 18%, Orchid initiated a 1:5 reverse stock split. The stock price then fell further. On October 13, Orchid Capital Corp. announced a new monthly dividend of $0.16, as well as a company buyback of 4.3 million shares of stock. The new yield is now over 19%.


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At this point, even with the buyback, Orchid Island Capital is a clear example of what could be a yield trap and investors should be cautious before proceeding with a purchase.

Office Properties Income Trust OPI is another REIT. Mortgage REITs are not the only ones facing possible dividend cuts and further downside. Office Property Income Trust is a Massachusetts-based REIT that owns, leases and manages office space. Many of its tenants are stable, and its portfolio includes about 20% in government offices.

Despite this, Office Properties Income Trust has fallen from $48 four years ago to a recent price near $15. Declining revenue since 2019 and recent negative EPS have hurt the stock. But another major reason was the quarterly dividend cut in January 2019 from $1.72 to 0.55. 

Office Properties Income Trust has maintained that dividend since then and the annual $2.20 now yields 14.6%. The most recent quarterly FFO of $1.22 was ample to cover the dividend, but its debt load of $2.49 billion continues to impact the company negatively.

Looking forward, Office Properties Income Trust looks like another REIT that may have to reduce its dividend unless it can get back on track. An ongoing recession with an office REIT would not help it either.

Read next: Rapidly Growing REIT Sustains 8% Dividend In Bear Market

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