One of the screens I perform when looking for stocks to buy is a search that gives me dividend stocks that also are cheap. The reason I’m looking for “dividend stocks”? Yes, the payout, but if a company is paying a dividend, chances are that it can afford to do so.
Sure, every now and then a company pays a dividend when it really should conserve its cash. But for the most part, paying shareholders many millions of dollars suggests the company is doing so because it can without undermining its own survival.
Interestingly, my screen lately has been turning up mostly real estate investment trusts (REITs) and mortgage real estate investment trusts (mREITs). The mREIT sector specifically is out of favor right now. Because these companies borrow money and then make a spread on it, 90% of which gets distributed, any increase in interest rates can harm their results. People appear afraid of interest-rate increases and have sold off REITs and mREITs.
In my opinion, now’s a good time to buy.
Cheap REITs – Arbor Realty Trust (ABR)
Dividend Yield: 7.9%
Arbor Realty Trust (ABR) is a REIT that handles “structured finance,” or loans that have unique issues associated with them.
Arbor plays in the commercial real estate industry, involving office, industrial, hospitality, retail, mixed use and multifamily properties. ABR offers bridge loans to borrowers who are trying to stabilize or reposition their properties. It also offers mezzanine loans — loans that are in the second position of a capital stack, subordinated to a senior position, and often earning interest in the low teens.
ABR also purchases both kinds of loans for its portfolio, as well as takes preferred equity positions in some types of deals. It also offers high-yield notes that are in senior position but are unsecured.
That’s a lot of ways to make a buck.
ABR is trading roughly 10% off its year-to-date peak in early June, as the market just isn’t loving these kinds of operations now. But the yield is nearly 8%, and it comes from a company that’s able to generate modest free cash flow.
Cheap REITs – Campus Crest Communities (CCG)
Dividend Yield: 10%
I’ve written before about Campus Crest Communities (CCG). It has a very interesting niche: the student housing sector.
I remember living in really crappy off-campus apartments in college, so a REIT that offers a nice community-style environment with nice digs would have been very welcome. Plus, kids are always going to be going to college, so one would think occupancy rates would always be pretty high.
The market remains unconvinced, however, relegating CCG to the category of cheap dividend stock. This is odd since CCG just reported leasing results with occupancy up 190 basis points and rates up 130 bps.
Then again, the company shifted management around and is focusing on current operations rather than development. The stock price hit a high of $14 in 2013, but is now trading at less than half that at $6.63.
Seems like the market needs convincing, even with the double-digit dividend.
Cheap REITs – New Residential Investment Corp. (NRZ)
The last cheap REIT I’m looking at is New Residential Investment Corp. (NRZ). I think the market doesn’t know what to make of this company and, as a result, it has never attracted much buyer interest.
NRZ deals in some difficult-to-understand operations and securities. It handles excess mortgage servicing rights, which is the fee left over after the interest rate on a mortgage is paid out to the mortgage holder, the servicer of the mortgage and the underwriter. So it’s like an indeterminate annuity.
But it also purchases distressed loans and non-agency residential mortgage-backed securities — very risky paper, as we say in the credit business. That’s why the stock sits at $6.02 — down 10% for the year to date. But it’s a speculative play that yields 11.7%. Worth it if you have the speculating money.
Do note that NRZ is about to undergo a 1-for-2 reverse split, so don’t panic if you see the price suddenly change.
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 email@example.com and follow his tweets at @ichabodscranium.