Can These REITs Keep Paying Big Dividends?

Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

For years now, REITs have been seen as an investment vehicle to generate a stable and consistent income stream for investors.  Since they are required to pay at least 90% of their taxable income in the form of dividends, they have been an attractive option for income-minded investors. 

Many investors make the mistake of making broad statements with regards to REITs.  In fact, they are very complex and very different.  You have to really understand how a particular REIT operates before you can even attempt to speculate about whether or not double-digit dividends will be going away. 

There are many articles that attempt to make the claim that REITs had a unique set of circumstances that allowed them to flourish over the past few years, and the times, well, they are changing.  The most common circumstance that REIT bears will point to is a low interest rate environment. 

True, REITs typically perform very well in low interest rate environments.  Common sense would dictate that with the Fed announcing that it expects to keep interest rates low through late 2014, wouldn’t it seem that the conditions will be right for almost two more years of high dividend payouts?  Granted, it’s a gross oversimplification to say that lower rates will guarantee continued high dividends, but it’s a really good start.  Other factors exist, like credit risk (which is mitigated by government backing) and prepayment risk (which could be a negative if barriers to refinancing are knocked down).   It would be more prudent to take a look at six REITs individually, and see if dividend cuts are in the future. 

Annaly Capital Management, Inc. (NYSE: NLY) is trading around $16 per share and has a dividend yield of 13.9%.  Annaly is the mREIT that gets the most attention.  It has had two recent small cuts and that has caused the bears to pile on.  Even if it has to cut its dividend another time, does it matter?  Its yield of close to 14% has a long way to go before it even gets to the industry average.  It’s the biggest most stable horse in this field, and if you were going to bet on one, you have to bet on Annaly.

Chimera Investment Corp. (NYSE: CIM) is trading around $3 per share and has a dividend yield of 15.8%.  While many mREITs only hold mortgage paper that is backed by government agencies, some do not.  Chimera is one of those mREITs.  These mortgages are much riskier, and therefore more volatile.  A scenario where credit continues to deteriorate will drastically reduce Chimera’s ability to maintain its dividend.  Again, the question is how much does it drop? And is it worth the risk when there are less risky options in this space?

Apollo Investment Corp. (NASDAQ: AINV) is trading around $7 per share and has a dividend yield of 14.9%.  Apollo is a business development corporation that is a leading provider of subordinated debt and equity capital to middle market companies.  This is a particularly difficult one to forecast and any the future will hinge on their credit quality.  Many can point to fundamentals and state that dividends will have to be cut going forward, but it is hard to make that claim that it will be a substantial cut with any certainty.

Armour Residential REIT, Inc. (NYSE: ARR) is trading around $7 per share and has a dividend yield of 18.7%.  Armour is more exposed to mortgages than other big-named REITs.  However, it is one of the Agency mREITs, and therefore limits its exposure.  It has a monster yield, and with rates remaining low for the next two years, should enjoy a nice spread.

MFA Financial, Inc. (NYSE: MFA) is trading around $7 per share.  Its 52 week high is $8.64 and has a dividend yield of 14.4%.  MFA Financial is another non-agency REIT, and as such, carries more exposure since it does not have a government guarantee.  However, it typically will trade at a discount to agency mREITs, and the more exposure could lead to better rewards. 

American Capital Agency Corp. (NASDAQ: AGNC) is trading around $29 per share and has a dividend yield of 19.2%.  American Capital Agency understands that its biggest risk comes in the form of prepayments since it is so heavily concentrated in fixed rate mortgages.  It has shown an ability to weather the storm by maintaining its dividend payout level, and returning a near 20% yield.  To top it off, it is an agency mREIT, and enjoys some credit protection. 

The issue really isn’t whether or not they will cut dividends; it is whether or not they will cut them drastically.  Taking some slight haircuts would still put you in a position to earn higher dividends than more than 80% of the other stocks out there.  In general, with rates remaining low, all of these REITs should be decent enough plays until late 2014.  Ranking them in highest to lowest in order of having the ability to return the highest dividends to investors over the next two years would be MFA first, NLY, ARR, AINV, and then CIM last. 


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