I have to admit that I’m a little nervous about dividend stocks.
Everybody and their grandmother has been on the hunt for yield for several years, and I think that’s one of the reason the market keeps moving higher. Investors left the bond markets, which are much larger than the equity markets, and have crept further and further out onto the yield curve, edging towards those higher and higher yields.
I just wonder when they’ll fall off, sending dividend stocks crashing.
To that end, I’m becoming more and more careful about dividend stocks and REITs. I’m trying to stick to safer bets that still pump out nice yields and aren’t exposed to large systemic risks, or ones that may have strong capital gains potential.
New York Mortgage Trust (NYMT)
New York Mortgage Trust (NYMT) doesn’t get a lot of love because it’s a mortgage REIT. That means it borrows money at these historically low interest rates, then deploys the capital into higher-yielding, mortgage-backed securities, and then throws 90% of its income to shareholders. Sooner or later, rates are going to rise, and these highly-leveraged plays will see their margins shrink. Then, presumably, comes the big selloff.
Some of these mortgage REITs are agency REITs, meaning that the mortgages they play in are guaranteed in some way by the federal government. These are more sensitive to interest rate movements, and NYMT stock had a healthy dose of these holdings. However, NYMT has attempted to get ahead of the curve by moving more into commercial mortgages and, one of my favorite spaces, distressed residential debt.
This is savvy management, and I think NYMT’s stock price of $8 is unfair, as investors don’t recognize these moves as being positive. NYMT stock also carries a 13.6% dividend yield which I believe is sustainable.
Arbor Realty Trust (ABR)
Arbor Realty Trust (ABR) is somewhat similar to NYMT. It securitizes commercial mortgages and issues securities backed by that paper. It runs a very efficient operation in being able to access low-cost short-term credit facilities. A whopping 95% of its debt stack is in match-funded, non-recourse facilities that are not subject to mark-to-market declines. You don’t get that kind of deal unless you have a great rep in this sector.
ABR stock is only up 4% in 2014, which trails the S&P 500 by a couple of percentage points. But the company is making moves to improve its operations. With more competition entering the space, the company expects yields to compress, so it is moving more into multi-family lending.
The REIT yields 7.5%, and the dividend appears to be sustainable.
Campus Crest Communities (CCG)
Campus Crest Communities (CCG) is one of several plays in the student housing sector. I like the concept because colleges continue to see increased enrollment, all those kids need places to live, and the trend is towards REITs like CCG giving them upscale facilities to do so in.
It’s a good business because those units are very likely to be filled since the school year is a pretty well-defined thing, and there’s always demand for student housing.
The REIT has struggled a bit, and since topping out at $14 per share in early 2013, CCG now sits at $8.25, yielding 7.4%. I think the company would benefit from more PR exposure in the financial marketplace. It has to compete with so many other sexier REIT plays, and there’s some needless skepticism regarding its ability to maintain a strong and healthy business. But with a yield that high, CCG stock pays enough for investors to wait for those changes to take hold.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets at @ichabodscranium.