If there’s one thing income investors love, it’s a high-yielding dividend stock.
But too often the high yield comes with risky metrics like declining revenue and earnings, which could force a company to cut its dividend to ensure it has the available funds to pay its shareholders.
When investors analyze real estate investment trusts (REITs), one important factor to consider is the payout ratio on earnings per share (EPS) for mortgage REITs (mREITs), or funds from operations (FFO) on all other types of REITs. The payout ratio is derived by dividing the annual dividend by the EPS or FFO.
Typically, a REIT with a payout ratio between 35% and 60% is considered ideal and safe from dividend cuts, while ratios between 60% and 75% are moderately safe, and payout ratios above 75% are considered unsafe. As a payout ratio approaches 100% of earnings, it generally portends a high risk for a dividend cut.
Take a look at four REITs with high dividend yields but whose payout ratios are all considered to be within the safety range, which may keep their high-yielding dividends intact for quite a while.
Cherry Hill Mortgage Investment Corp. CHMI is a Farmingdale, New Jersey-based mortgage REIT (mREIT) that acquires and manages a diversified portfolio of mortgage servicing rights (MSRs), agency residential mortgage-backed securities (RMBS) and other types of residential mortgage assets.
The annual dividend of $1.08 per share yields an unusually high 18.2% but is easily covered by forward EPS of $2.66, with a payout ratio of 40%. Its five-year dividend average is only 13.79%, which also suggests that Cherry Hill Mortgage Investment could be quite undervalued.
Two Harbors Investment Corp. TWO is a St. Louis Park, Minnesota-based mortgage REIT with a similar investment model to Cherry Hill Mortgage Investment Corp.
Two Harbors Investment announced a reverse 1-for-4 stock split in November and repurchased almost 3 million shares of its preferred stock during the third quarter. Shares are up over 25% since Two Harbors Investment touched a low of $12.12 in mid-October.
The dividend of $2.40 yields 14.9% and is well covered by forward EPS of $4.60 for a payout ratio of 52%. Its five-year dividend yield average is 12.49%.
Alpine Income Property Trust Inc. PINE is a Daytona Beach, Florida-based retail REIT that owns and operates 146 high-quality, net-leased properties across 35 states. Its tenants include well-known companies such as Lowe’s , Dollar Tree, Walgreens, Walmart, Advance Auto Parts and Dick’s Sporting Goods Inc. In the third quarter of 2022, Alpine Income Property Trust had a perfect occupancy rate of 100%.
Overall, its third-quarter operating results were excellent. FFO of $0.40 was $0.03 better than the third quarter of 2021 and topped Wall Street’s view by $0.02. Revenue of $11.53 million was 41% above $8.17 million in the third quarter of 2021 and also ahead of analysts’ estimates of $10.52 million. Alpine Income Property Trust also raised its FFO guidance from a range of $1.58 to $1.63 to $1.74 to $1.76 for 2022.
Alpine Income Property pays an annual dividend of $1.10 per share, yielding 5.78%, and the dividend is easily covered by forward FFO of $2.57, for a payout ratio of 42%.
Boston Properties Inc. BXP is a Boston-based office REIT with 181 properties concentrated in the six largest cities from Boston to Seattle. The firm calls itself “the largest publicly traded developer, owner and manager of premier workplaces in the United States.”
Boston Properties’ recent third-quarter operating results were markedly improved from its third quarter of 2021 and easily outperformed analysts’ expectations.
Boston Properties’ annual dividend of $3.92 per share yields 5.85% and the forward FFO is $7.51, so the payout ratio is 52%.
While the payout ratio is not a magic metric to predict a stock’s future performance, it usually gives income investors a clear look at the safety of the current dividend.
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