5 High Yield REITs Pumping Out Juicy Distributions
Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
High yield REITs can provide significant distributions to investors, because tax requirements mandate that REITs pay 90% of profits through partner distributions to keep their beneficial tax status. Their high income can be beguiling, but with high income can come unique risks. In this article, I analyze five high yield REITs to see which ones are the best choices on a valuation basis.
Annaly Capital Management Inc (NYSE: NLY) currently has a share price around $16.40 within its narrow 52-week trading range of $14.05-$18.79. It has a market cap of around $15.89 billion, shows a price earnings ratio of 5.40 and pays a dividend of $2.28 for an astounding yield of $16.60%. Annaly is most profitable in a low interest environment because it borrows at prime rate, currently 3.75% and invests the money into government backed mortgage securities. This gives it practically a license to print money. The one concern is the high payout ratio. REITs are required to have a high payout, but Anally has been paying out more than 100% of its revenues for the last few years. In its last quarter it took several one-time charges in its income and the payout ratio exploded to an unsustainable 147%.Company performance should continue to flourish in the current interest rate environment, but the payout ratio has to come down. That could mean decreased dividends in the future, and a potential hit to the future stock price.
Next we turn to a cheap alternative in Chimera Investment Corporation (NYSE: CIM) who has a recent price of around $2.76 within a 52-week trading range of $2.38-$4.34. Earnings per share are $0.50 giving it a minuscule price earnings ratio of 5.52, while its $0.44 annual dividend gives a yield of 16.06%. Chimera takes a much riskier approach to investing than Annaly, with only 47% of their investments in guaranteed debt. With the European credit implosion shaking credit markets, Chimera is more exposed than most to take some serious hits should more disasters strike. Chimera is protected on the downside at least sine it uses far less leverage than its other high dividend mates. Its leverage ratio is a bit over 2 while the others in this group have a leverage in the 6-7 range. Management has shown an excellent ability to pick its way through the minefield of modern day finance, but like Annaly there is a good deal of risk to go along with the juicy income.
Cypress Sharpridge (NYSE: CYS) has a share price around $13.37 which is near the top of its 52-week trading range of $10.52-$13.78. It has a market cap of $1.1 billion, a price earnings ratio of 12.30 its dividend of $2.00 produces a yield of 16.40%. The Cypress payout ratio makes even Annaly look good, a whopping 321.6%, mostly because the REIT has been taking some serious hits on its portfolio. Its earnings per share has dropped a -467.83%, with a big drop off beginning in the 3rd quarter 2010 when earnings per share dropped from $0.58 the previous quarter to $0.24. It has struggled to try to get earnings back up, 2nd quarter 2011 popped back to $0.50 before falling again back in the 3rd quarter. Through all of this Cypress has stubbornly continued with its high dividend. There either has to be a huge turnaround in earnings, the dividend will get cut or the fund will find itself in financial problems. Only very aggressive investors willing to watch every twitch of this stock should consider Cypress Sharpridge.
Armour Residential REIT Inc (NYSE: ARR) has a recent stock price of around $7.05 and a 52-week trading range of $5.40-$8.05. It is the smallest of these REITs with a market cap of only about $535 million. It has a price to earnings ratio of 4.90. An annualized dividend of $1.32 Armour is just closing on a secondary equity sale of 9 million shares which it intends to use in establishing a dividend reinvestment plan for shareholders. Armour has a much greater exposure to the residential mortgage market than the other REITs on this list, and with the problems of upside-down mortgages still roiling the market. Armour could be even more of a wild ride than the others.
Our final REIT is American Capital Agency (NASDAQ: AGNC) which has a recent stock price around $28.35, a 52-week trading range of $22.03-$30.76, a minuscule price earnings ratio of 3.60 while its $5.60 dividend produces a whopping 20.70% yield. It does this by using an incredibly sane (at least for a REIT) payout ratio of 94.8%. It has a healthy return on investments. There is the same concern over its susceptibility to market shocks if there are future problems in securitized mortgages, however American Capital mirrors Annaly's approach of only investing in government-guaranteed instruments - which in the current low interest/high default environment provides more safety.
Of these high distribution payers it looks like American Capital is by far the best choice, since the high payout is tied to a much safer and conservative earnings to payout structure and for those looking for a modicum of safety in this nervous group American fills the need. For those willing to extend to even greater heights of daring, Chimera offers some staggering upside if it can use its lower leverage position to extract profits from its non-guaranteed approach.
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