4 Top Picks for 10% Dividend Yields
Prepare for graphs, images and tables, because they speak louder than words. The ratings and outlook we highlight here come after Scott Kennedy’s Weekly Updates in the FPI Forum. Your continued feedback is greatly appreciated, so please leave a comment with suggestions.
We bring you the latest in inefficient markets. We’re going to focus on preferred stocks, and we’ll cover 8 of them in this article.
We start with 4 of them from the same REIT:
- RITM-A (RITM.PA)
- RITM-B (RITM.PB)
- RITM-C (RITM.PC)
- RITM-D (RITM.PD)
The comparison looks like this:
Which has the lowest floating yield on the price? RITM-A.
Which has the least advantage to call value? RITM-A.
If investors assume that Rithm (RITM) is going to redeem the shares on 08/15/2024, then they would prefer to have RITM-B for a significantly larger capital gain. If they assume RITM won’t call the stock, then RITM-B still wins for the much higher return after the stock starts floating.
What if RITM only calls RITM-A but does not call RITM-B? In this scenario, RITM-B would likely start trading very close to $25.00. So, even though it wouldn’t be a call, investors would likely have the option to close their position at a similar price. It is very unusual to see a stock called at $25.00 when a very similar stock is trading significantly below $25.00. What if that happened? Well, investors would still get a great return on RITM-B shares.
Now what about RITM-C and RITM-D? they take longer to float. However, RITM-C offers the biggest benefit of call value. This is pretty cool for maximizing potential gains. On the other hand, RITM-D has the largest floating spread, which is great for generating income after stocks start floating.
What if you assume that rates will be high in 2024 and then fall to 0 in 2026? You should then probably consider fixed rate stocks and there are also great opportunities in fixed rate stocks. However, it should be noted that even if you assume that rates are falling, the RITM-D’s 6.223% spread is still quite large. With shares trading below $22.50, investors are getting quite a bit of extra stock for their investment. If rates were close to 0% and the investor‘s return on costs was still around 7%, that would still be pretty good.
I was going to jump into common stock here, but this section got so big that it wasn’t going to mix well with preferred stock.
Instead, I want to highlight a few more preferred stocks:
- NLY-F (NLY.PF)
- NLY-G (NLY.PG)
- NLY-I (NLY.PI)
The table is shown below:
The relative attractiveness is quite similar now. The Buy Price column only extends from 93.8% to 95.8%. That’s a difference of 200 basis points, which is reasonably small. However, the market has not always been so efficient.
You might notice that NLY-G was often the most expensive part to ride one way. Why ? Because the 3 stocks traded roughly at $25.00 despite NLY-G having a significantly lower floating spread. The difference between 4.172% and 4.989% is significant and justifies a price difference. Today, investors could choose one of 3 and get a pretty similar deal. Each is good enough, but not great. In this environment, we can get much better discounts with other actions.
For investors willing to take a little more risk, I want to suggest MFA-C (MFA.PC):
The shares are at a substantial discount to call value and a substantial discount to our targets. The floating spread of 5.345% isn’t too bad, although it isn’t great either. However, when stocks are trading near $20, it becomes much more attractive. The dividend rate is based on the purchase value of $25, so buying close to $20 means investors get 25% more shares and therefore 25% more income. If short-term rates remained at current levels, the yield on these stocks (at the current price) would rise to 10.6%. This is significantly higher than the stripped yield of 8.24% today, although I find the stripped yield of 8.24% to be a respectable yield anyway.
Following this review, my top picks from the stocks we discussed are RITM-B, RITM-C, RITM-D, and MFA-C.
RITM-A offers a significantly lower risk/reward profile. NLY preferred stock is cheap enough to be attractive, but we are spoiled for choice. Although attractive, they are clearly not as appealing as the other options.
The rest of the charts in this article may be self-explanatory for some investors. However, if you want to know more about them, we encourage you to check out our notes for the series.
Table of actions
We’ll end the rest of the article with the charts and graphs we provide to readers to help them follow the common stock and preferred stock industry.
We include a quick table for common stocks that will be displayed in our tables:
Let the pictures begin!
Residential Mortgage REIT Charts
Note: The chart in our public articles uses the book value per share from the last earnings release. The current estimated book value per share is used to achieve our trading objectives and decisions. It is available in our service, but these estimates are not included in the tables below.
Charts of Commercial Mortgage REITs
Preferred Share Charts
Preferred Share Data
Beyond the charts, we also provide our readers with access to several other metrics for preferred shares.
After testing a preferred stock series, we decided to try merging it with the common stock series. After all, we are still talking about positions in mortgage REITs. We don’t want to cover preferred stocks without cumulative dividends, so all of the preferred stocks you see in our column will have cumulative dividends. You can verify this using Quantum Online. We have included the links in the table below.
To better organize the table, we needed to abbreviate the column names as follows:
- Price = Recent Stock Price – Shown in Charts
- BoF = Bond or FTF (Fixed-to-Floating)
- S-Yield = Stripped Yield – Shown in charts
- Coupon = Initial Fixed Rate Coupon
- FYoP = Floating Yield on Price – Shown in Charts
- NCD = Next Call Date (nearest stocks could be called)
- Note: For all FTF issues, the floating rate would start at NCD.
- WCC = Worst Cash to Call (lowest possible net cash yield from a call)
- QO Link = Link to Quantum Online Page
Our goal is to maximize total returns. We achieve this most effectively by including “trading” strategies. We routinely trade positions in common stocks of mortgage REITs and BDCs because:
- Prices are inefficient.
- Over the long term, stock prices generally revolve around book value.
- Short-term price-to-book ratios can deviate significantly.
- The book value is not the only step in the analysis, but it is the cornerstone.
We also allocate preferred stocks and equity REITs. We encourage buy-and-hold investors to consider using more preferred stocks and equity REITs.
We benchmark our performance against 4 ETFs that investors could use to gain exposure to our sectors:
The 4 ETFs we use for the comparison are:
One of the largest mortgage REIT ETFs
One of the largest preferred stock ETFs
Largest Equity REIT ETF
The REIT high-yield equity ETF. Yes, it was appalling.
When investors think it’s not possible to get strong returns with preferred stocks or mortgage REITs, we politely disagree. The sector is brimming with opportunity, but investors still need to beware of risk. We can’t just aim for performance and hope for the best. With respect to common stocks, we must be even more vigilant in protecting our capital by regularly monitoring prices and updating estimates of book value and price targets.
Ratings: Bullish on RITM-B, RITM-C, RITM-D, MFA-C