Watch Out - These 5 REITs Could Be Yield Traps

A yield trap is a stock that presently pays a very attractive dividend yield but is likely to have to cut its dividend soon.

Beginning investors often make the mistake of choosing stocks simply based on high dividend yields, but often these are yield traps at high risk for cutting the dividend. When dividends are cut, the investor receives the double whammy of a price drop and a smaller dividend.

Investors can reduce the risk of buying a yield trap by focusing on two key factors — the relationship between earnings and dividends being paid (the payout ratio) and the company's history of cutting, suspending or raising the dividend. If the dividend being paid is more than the earnings being generated, a dividend cut becomes likely.

Take a look at six real estate investment trusts (REITs) that are at high risk for being yield traps based on one or both of the key factors cited.

Global Net Lease Inc. GNL is a New York-based net-lease diversified REIT, founded in 2011. Its portfolio of over 1,296 properties covers 66.8 million square feet across 11 countries. It has a 96% lease rate with a weighted average remaining lease term of 6.8 years. Properties in the U.S. and Canada account for 80% of Global Net Lease's portfolio, and another 20% are in Europe.

Global Net Lease pays a quarterly dividend of $0.35 and the annualized $1.40 dividend presently yields 19%. But the dividend was cut from $0.53 to $0.40 per share in April 2020 and again to $0.35 per share in October 2023. With forward funds from operations (FFO) of only $1.09, the payout ratio of 130% is too high to be sustainable. The FFO has also declined in five of the last six quarters, so the declining fundamentals are a huge red flag for investors.

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

Orchid pays a monthly dividend of $0.12 per share and the $1.44 annualized dividend now yields 16.64%. But over the last five years, the dividend has been cut five times.

In addition, Orchid has produced negative earnings per share (EPS) in five consecutive quarters and has had four consecutive quarters of negative revenue. So Orchid is paying $1.44 in annual dividends while earning a negative $0.25 per share. Those numbers won't work for long. 

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Orchid is at extremely high risk of having to cut dividends again, and investors should not be taken in by the high dividend rate.  

Ares Commercial Real Estate Corp. ACRE is a New York City-based mortgage REIT that originates and invests in commercial real estate loans and other investments in the U.S. Ares was incorporated in 2011.

Ares Commercial pays a quarterly dividend of $0.25 per share, but the dividend was cut from $0.35 to $0.33 in September and cut again to $0.25 per share in February.

The $1 annualized dividend yields 13.27%, but don't count on this yield remaining that high in the future when the forward EPS is only $0.17 per share.

Dynex Capital Inc. DX is a Glen Allen, Virginia-based mortgage REIT that invests in mortgage-backed securities (MBS) on a leveraged basis. It has a portfolio fair value of $7.4 billion. Dynex was incorporated in 1987.

Dynex Capital pays a monthly dividend of $0.13 per share. To its credit, the dividend has been stable since June 2020. However, the dividend was cut in August 2019 and May 2020. And the annualized dividend of $1.56 per share does not cover the forward EPS of negative $0.12 per share. Dynex has had four consecutive quarters of negative EPS and revenue.

The 12.27% dividend yield is enticing, but this REIT is a potential yield trap and best avoided. 

Generation Income Properties Inc. GIPR is a Tampa, Florida-based diversified REIT that owns 26 single-tenant properties, including retail, office and industrial net lease properties in densely populated areas. Seventy-two percent of its tenants are investment grade credit or equivalent. Generation Income is still a small company that was founded in 2015 and went public in 2021.

Generation Income pays a monthly dividend of $0.039, and the annual dividend of $0.468 presently yields 12.58%. The dividend was cut from $0.54 per share to $0.39 per share in October 2022.

In addition to the dividend cut, this is another REIT with four consecutive quarters of negative FFO. The annualized dividend rate of $0.47 is unsustainable with a forward FFO of negative $0.22.

Although each of the preceding REITs may pay a nice dividend a time or two going forward, the potential for further dividend cuts and or declines in share price is too obvious to ignore. Investors should consider looking for better options, even if the dividend yields are smaller.

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