Key Points
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AGNC Investment may have sufficient coverage now for its 16.7% dividend, but a continuation of current interest-rate trends could bode poorly for the mortgage rate.
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Annaly Capital Management has similar risks, but recent upbeat statements from management suggest a possible path to steadier payouts and stronger total returns.
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Among the three mortgage REITs, Rithm Capital arguably offers greater dividend security.
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With the S&P 500 (SNPINDEX: ^GSPC) yielding around 1%, double-digit percentage dividend stocks stand out in the eyes of income-focused investors. However, as the saying goes, “There’s no such thing as a free lunch.” There’s a reason these super high-yield dividend stocks exist: The market has slept on their fundamentals.
Double-digit yields can often serve as a red flag, signaling stocks at risk of a dividend cut or, worse, deteriorating fundamentals that lead to significant stock price declines that outweigh the juicy payouts. However, in the case of these three, all of which are mortgage real estate investment trusts (REITs), dividend coverage is not an issue, at least for now: AGNC Investment Corp. (NASDAQ: AGNC), Annaly Capital Management (NYSE: NLY), and Rithm Capital (NYSE: RITM).
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AGNC Investment Corp. yields 16.7%, but tread carefully
On Oct. 19, AGNC Investment, one of the largest mortgage REITs, and perhaps regarded by its fans as one of the best monthly dividend stocks, released its latest quarterly results. Although AGNC reported comprehensive losses of $1.28 per share, its net spread, or the difference between the yield on its mortgage portfolio and its short-term debt financing, was $0.37 per share, just above the stock’s quarterly dividend of around $0.36 per share.
In other words, as with other mortgage REITs, rising interest rates negatively affected the value of its portfolio, even as it continued to generate positive interest income. The “comprehensive losses” were largely due to mark-to-market write-downs of its portfolio. Yet while this may explain how AGNC can, for now, maintain its 16.7% forward dividend yield, if rates keep rising from here, it could bode badly for it in two ways.
First, if AGNC’s book value continues to decline, expect the stock price to follow. That’s what has happened in the past, especially since a rising-rate environment first emerged. Over the last five years, the stock has fallen by around 45.7%.
Second, if the rising rate trend persists, AGNC could have to temporarily slash its monthly dividend again, as it did in 2022. Although investors in this stock since 2021 are still ahead, given the dividend, AGNC’s total return is less than 10% over the five years and pales in comparison to the S&P 500’s 76.7% total return during this same time frame.
A silver lining for Annaly Capital Management and its 16.5% dividend
Annaly Capital Management is the largest residential mortgage REIT, with a total portfolio worth around $107 billion. Similar to AGNC Investment, last quarter Annaly reported significant generally accepted accounting principles (GAAP) losses yet generated sufficient dividend coverage based on earnings available for distribution (EAD), using a metric that measures cash flow from its mortgage portfolio rather than including mark-to-market losses. EAD came in at $0.80 per share, while Annaly currently pays a $0.75-per-share quarterly dividend.
Similarly, this suggests that Annaly could be subject to the same risks as AGNC, such as a future dividend cut or an outsize share price drop due to a decline in book value. Yet while these are serious concerns with Annaly Capital Management, there could be a silver lining: management’s optimism regarding future results. As CEO David Finkelstein noted on the REIT’s latest earnings conference call, Annaly expects to “out-earn in Q4,” although he remained vague about 2027 prospects
Although Annaly, like AGNC, has performed poorly since the 2022 interest rate hikes, the coming five years may not necessarily be a repeat of the past five. At the very least, if interest rates hold steady, there may be a path for Annaly to continue out-earning its dividend, and for its book value to stabilize. That’s not to say this stock could hold steady while paying its current 16.5% forward dividend, but it could create a scenario in which the stock generates more satisfactory total returns for investors.
Rithm Capital may be best-equipped to maintain its double-digit yield
Rithm Capital has a far lower forward dividend yield than the two aforementioned mortgage REITs, 10.7%. However, this lower yield, plus Rithm’s diversification beyond mortgages, may be what gives it greater dividend safety than AGNC or Annaly.
Calling itself a “global alternative asset manager,” Newrez, Rithm’s mortgage origination and servicing business, operates two separate asset management companies and a construction lending segment. Rithm also owns several office buildings in New York and and San Francisco.
Although macro factors like interest rates affect its business across the board, this diversification, with much of its income derived from fees and other streams rather than net interest margins, signals an even higher level of dividend security. The figures and facts back this up as well. Last quarter, for instance, Rithm reported $0.55 per share in earnings available for distribution, or more than 2x coverage for its $0.25-per-share quarterly dividend.
Going back longer term, in contrast to AGNC and Annaly, Rithm Capital maintained this payout since before the 2022 rate hikes. Don’t get me wrong: Rithm Capital comes with its own set of risks. Total returns for this stock, although far higher than with AGNC and Annaly, are still relatively weak compared to the S&P 500. Still, if portfolio income is your goal and you’re looking to add a mortgage REIT with a double-digit yield into the mix, Rithm Capital may be your best option.
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Thomas Niel has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
