Mortgage REITs have a special place in the hearts of investors thanks to the ultra-low interest rate environment, which has made their dividends extremely attractive. Given that the 10-year Treasuries are currently offering only 1.94%, the double-digit dividends offered by many mREITs attract the retail investor.
However, the prevailing macroeconomic environment is not ideal for a mortgage business model. Therefore, investors looking to invest in mREITs in order to expand their regular income should look at some dividend sustainability measures. This article features three top dividend paying mREITs and some analysis on their dividend paying ability.
Sustainable dividends for these companies
New York Mortgage Trust, Inc. (NASDAQ:NYMT) is a relatively small mortgage REIT that offers a dividend yield of 15.50% on its quarterly dividend payment of $0.27 per share. During the prior year, when most mREITs were slashing their shareholder distributions, New York Mortgage Trust, Inc. (NASDAQ:NYMT) increased its divided by 8% and has been able to maintain it since then. The increase in the dividend rate was largely due to the company’s diverse investment mix.
The company has investments in multi-family CMBS, Agency RMBS, both fixed and adjustable rate and loans sourced from distressed markets. Around 42% of the company’s investment portfolio is composed of fixed rate Agency residential mortgage backed securities, while another 17% are Agency adjustable-rates. Around 14% are commercial mortgage backed securities, while 4% account for distressed residential loans.
Looking at the company’s past four quarters’ financial disclosures, I arrive at an average cash dividend coverage ratio of 1.12 times. This means that over the past four quarters, the company generated more operating cash flow than was required for its regular dividend payment. Therefore, it is fair to say that the dividends are sustainable.
American Capital Mortgage Investment Crp (NASDAQ:MTGE) is a hybrid mortgage REIT with investments in both Agency and non-Agency residential mortgage backed securities. The company is managed by the same management which manages American Capital Agency. Around 6% of the company’s investment portfolio is non-Agency, while the remaining is Agency and net long TBA positions. Within the Agency portfolio, the 30-year fixed rate security is 72%.
The company’s past four quarter average cash dividend coverage ratio comes out to be 1.42 times, meaning the company has enough financial muscle to sustain the current dividends. Besides, I believe the company has the financial muscle to sustain some compression in its spread before a dividend hike is evident. Therefore, I am bullish on the stock.