These 4 REITs Have Huge Dividend Yields - But Are They A Trap?

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With the stock market in the red for the third straight week and recession warnings ramping up, markets are more volatile than ever. 

Despite the Federal Reserve’s seven consecutive rate hikes this year, November inflation data were slightly hotter than expected, rejuvenating investors’ fears. 

“The economic numbers announced today highlight the difficulty for investors today, where weak numbers bring recession fears and strong numbers bring Fed fear,” said Louis Navellier, founder and CEO of growth investing firm Navellier & Associates.

Investors are flocking toward investments with high dividend payouts to shield their portfolios from market fluctuations. While publicly-traded real estate investment trusts (REITs) with high dividend yields stick out, it is crucial to distinguish fundamentally sound REITs from yield traps. 

Some of the highest dividend-yielding REITs are discussed below. 

Annaly Capital Management

Annaly Capital Management Inc. NLY is one of the largest residential mortgage REITs in the U.S., with over $86 billion in total assets. It is also one of the best-performing REITs — its shares have surged 5.1% over the past five days. 

Though the REIT has had a difficult year amid the macroeconomic and sector headwinds, it looks promising at the current price levels. Billionaire fixed-income investor Bill Gross, often hailed as the Bond King, has been buying shares of Annaly Capital Management. He expects the REIT’s profit margins to improve as the Fed slows its rate hike pace in the upcoming months. 

Annaly Capital pays $3.52 in dividends annually, translating to a 15.65% yield. In the fiscal third quarter that ended Sept. 30, the REIT’s earnings per share (EPS) came in at $1.05, beating analysts’ estimates by 6.5%. 

ARMOUR Residential REIT

Maryland-based ARMOUR Residential REIT Inc. ARR has a 20.37% dividend yield, one of the highest in the sector. Currently trading at $5.89, ARMOUR Residential pays $1.20 in dividends annually, divided into 12 equal installments. While this might be tempting, the REIT’s financials paint a different story. In actuality, ARMOUR Residential’s dividend payouts have declined at an 18% compound annual growth rate (CAGR) over the past three years. 

The REIT’s book value fell 19.59% sequentially to $5.83 for the fiscal third quarter that ended Sept. 30 because of the rapidly cooling housing market. ARMOUR Residential’s net interest income came in at $25.1 million in the last quarter, 21.8% lower than the consensus estimate of $34.8 million. Comprehensive net loss widened by over 63% quarter over quarter to $152.7 million, while net interest income fell by more than $10 million over this period. 

As home sales register the slowest growth since November 2010 (except the monthly decline in May 2020 because of the COVID-19 pandemic), analysts expect the REIT’s earnings to decline at a rate of 11.4% per annum over the next five years. 

Check out: This Fund Should Produce Moderate Returns If The Real Estate Market Doesn't Collapse – And Spectacular Returns If It Does

Invesco Mortgage Capital

With a 19.77% annualized dividend yield, Invesco Mortgage Capital Inc. IVR is the third on this list. The mortgage REIT (mREIT) focuses on financing residential and commercial mortgages across the U.S. Invesco Mortgage Capital’s four-year average dividend yield stands at 24.43%. 

But the REIT has a rather bleak dividend payout history. Over the past three years, Invesco Mortgage Capital’s dividend payouts have declined at a 42.6% CAGR. It slashed its annual dividend payouts significantly from $10.70 in 2020 to $3.50 last year, despite the strong real estate market trends. 

Invesco Mortgage Capital also reduced its quarterly dividend distribution by 27.7% quarter over quarter to 65 cents in the last quarter, compared to a 90-cent-per-share payout in the fiscal second quarter. The REIT currently pays $2.60 annually divided into four quarterly installments. 

The mREIT has been battered by the aggressive rate hikes this year, with its bottom line remaining in the red. 

“Book value declined as valuations on our agency RMBS (residential mortgage-backed securities) holdings were pressured lower by sharply higher interest rates, elevated volatility, reduced liquidity and a general risk-off tone in financial markets,” Invesco Mortgage Capital CEO John Anzalone said. “Given a rapidly evolving monetary policy landscape, our outlook on the sector remains cautious in the near term.”

Orchid Island Capital

Orchid Island Capital Inc. ORC is a specialty finance company investing in agency residential mortgage-backed securities. The mREIT pays $1.92 in dividends annually, yielding 17.3% on the current price. 

But Orchid Island Capital’s troubling history makes it a prime example of a yield trap. Orchid shares have plummeted by over 75% over the last five years and more than 50% in the past year alone. 

Apart from this, the REIT’s dividend payouts have declined at an 11.9% CAGR over the past three years and at a 17.1% CAGR over the past five years. Orchid Island Capital has slashed its dividend per share by over 50% from $3.9 in 2021 to below $2 this year.

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