3 Mortgage REITs With The Highest Dividends

Mortgage real estate investment trusts (REITs( are companies that loan money on income-producing properties using mortgage-backed securities (MBS) or borrowing funds to originate their own mortgages. 

The spread between borrowing costs and lending rates is what brings them profits. But rising interest rates deplete the spreads they make between what they borrow and what they lend.

Many income investors have remained on the sidelines as prices of mortgage REITs (mREITs) have been decimated by 40% or 50% in 2022 because of numerous interest rate hikes by the Federal Reserve.

But investors always want to look to the future. Do these stocks have further to fall or are they near bottoms? Should investors overlook short-term risk in favor of the inflated dividend yields the mREiTs are now offering?

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Here is a look at the three highest dividend yields among the mREIT stocks:

Invesco Mortgage Capital Inc. IVR is an Atlanta, Georgia-based mREIT that invests in both commercial and residential properties.

Two weeks ago, Invesco Mortgage Capital announced it was cutting its dividend by 28%, following a difficult second-quarter earnings report. Other mREIT stocks sold off in tandem following the announcement.

The dividend has not been stable in recent years. Since 2019, the quarterly dividend has gone through a series of cuts and raises and is only 65 cents now compared to $5 in 2019. Yet, because of the price decline, the yield today is still 25%.

Invesco Mortgage Capital’s fundamentals have not been good. Revenue and earnings per share (EPS) have been negative over the past three quarters. High yield or not, investors need to use a great deal of caution before considering a purchase, especially before the next earnings report on Nov. 1.

Armour Residential REIT Inc. ARR is a Vero Beach, Florida-based mREIT that invests in residential mortgage-backed securities from Fannie Mae and Freddie Mac, among other government agencies.

Armour Residential REIT pays a monthly dividend that many income-oriented investors prefer. But the stock and dividend have been anything but stable. In 2017, it traded for $25.50 and the dividend was 19 cents per month. But since then, the stock has dropped precipitously. It recently traded near $4.70. The dividend was cut in 2020 and is now only 10 cents per share.

The $1.20 annual dividend now yields a whopping 25.5%. But Armour Residential REIT’s problems, such as poor cash flow and negative EPS and revenue, remain. In addition, the dividend could get cut again because funds from operation (FFO) from the most recent quarter were negative 55 cents.

So does it make sense for an investor to buy Armour Residential REIT for the super-high dividend yield? It could be a major risk at this point.

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MFA Financial Inc. MFA is another mREIT that invests in residential mortgage-backed securities and whole loans.

MFA Financial stock has lost almost 60% since December 2021. At a recent price of $7.65, the annual dividend of $1.76 yields 23%. But the FFO from its last quarter was negative 95 cents. Therefore, MFA Financial could very well see another dividend cut.

Another problem with MFA Financial stock is a beta of 1.69. In a volatile year like 2022, a stock with a beta that high can lose 4% or more in a day. In fact, MFA Financial has lost about 30% in just the last three weeks. It’s great to have a huge dividend, but not when you lose that much share price and not when the FFO cannot support the dividend being paid.

So in summary, while yields of 23% to 25% sound great, investors need to use extreme caution with stocks whose prices and dividends have been anything but stable.

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