However, the prevailing macroeconomic environment is not ideal for a mortgage business model. Therefore, investors looking to invest in mREITs in order to expand their regular income should look at some dividend sustainability measures. This article features three top dividend paying mREITs and some analysis on their dividend paying ability.
Sustainable dividends for these companies
New York Mortgage Trust, Inc. (NASDAQ:NYMT) is a relatively small mortgage REIT that offers a dividend yield of 15.50% on its quarterly dividend payment of $0.27 per share. During the prior year, when most mREITs were slashing their shareholder distributions, New York Mortgage Trust, Inc. (NASDAQ:NYMT) increased its divided by 8% and has been able to maintain it since then. The increase in the dividend rate was largely due to the company’s diverse investment mix.
The company has investments in multi-family CMBS, Agency RMBS, both fixed and adjustable rate and loans sourced from distressed markets. Around 42% of the company’s investment portfolio is composed of fixed rate Agency residential mortgage backed securities, while another 17% are Agency adjustable-rates. Around 14% are commercial mortgage backed securities, while 4% account for distressed residential loans.
Looking at the company’s past four quarters’ financial disclosures, I arrive at an average cash dividend coverage ratio of 1.12 times. This means that over the past four quarters, the company generated more operating cash flow than was required for its regular dividend payment. Therefore, it is fair to say that the dividends are sustainable.
American Capital Mortgage Investment Crp (NASDAQ:MTGE) is a hybrid mortgage REIT with investments in both Agency and non-Agency residential mortgage backed securities. The company is managed by the same management which manages American Capital Agency. Around 6% of the company’s investment portfolio is non-Agency, while the remaining is Agency and net long TBA positions. Within the Agency portfolio, the 30-year fixed rate security is 72%.
The company’s past four quarter average cash dividend coverage ratio comes out to be 1.42 times, meaning the company has enough financial muscle to sustain the current dividends. Besides, I believe the company has the financial muscle to sustain some compression in its spread before a dividend hike is evident. Therefore, I am bullish on the stock.
Dividend in danger?
Newcastle Investment Corp. (NYSE:NCT) is another mortgage REIT which was able to increase its quarterly dividend 10% during the prior year. Currently, the company is yielding 16.3% on its quarterly dividend rate of $0.22 per share. Besides, the company is trading in proximity to its 52-week low at a significant discount of 24% to its most recent book value.
The company invests in excess mortgage servicing rights (MSRs), non-Agency RMBS, CMBS, and other commercial real estate debt. Going forward, I believe the company will benefit from a shift towards senior housing and away from commercial real estate.
Using the past four quarters’ financial disclosures, I arrive at an average cash dividend coverage ratio of 0.77 times. This clearly means that Newcastle Investment Corp. (NYSE:NCT) is not making enough cash through its regular operations to maintain its current dividends. Therefore, you can expect a dividend cut at Newcastle Investment Corp. (NYSE:NCT).
Conclusion
The above analysis leads me to recommend American Capital Mortgage Investment Crp (NASDAQ:MTGE) and New York Mortgage Trust, Inc. (NASDAQ:NYMT) as they both have enough financial muscle to maintain their current dividends. In contrast, I recommend income oriented investors stay away from Newcastle Investment Corp. (NYSE:NCT) as the company may experience a dividend cut.
The article Are Your Dividends Sustainable? originally appeared on Fool.com and is written by Adnan Khan.
Adnan Khan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Adnan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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