Income investors often allocate a sizeable portion of their portfolio to real estate investment trusts, or REITs, as these names typically pay high yields. Since REITs have to distribute at least 90% of their taxable income to shareholders via dividends, these stocks can be a good source of income.
Of course, yield shouldn’t be the sole purpose for making an investment, as the underlying company needs to have a strong business model that supports the dividend. Otherwise, the dividend could be drastically cut, which would be painful for the investors requiring income.
For those with a higher tolerance for risk, there are high yields that could be attractive. This article will examine three high-dividend REITs that might appeal to those investors with a higher tolerance for risk as the dividend payout ratios are elevated. This includes:
|NYMT||New York Mortgage Trust||$2.31|
Broadmark Realty (BRMK)
The first name for consideration is Broadmark Realty (NYSE:BRMK). The $721 million trust formed in 2010 and has only traded in the public markets since 2019. The trust has generated revenue of $120 million over the last year.
Broadmark Realty provides short-term, first deed of trust loans secured by real estate to clients for the purposes of construction projects. While young, the trust has originated almost $3 billion of loans since its formation more than a decade ago.
The trust operates a fairly diverse business model that has experienced rapid growth in a short period of time. As of the most recent quarter, Broadmark Realty had a total portfolio loan value of $1.6 billion. For context, the trust’s loans totaled just $117 million in 2014.
The portfolio includes loans to clients in 20 different U.S. states and the District of Columbia. The portfolio is almost evenly split between residential and commercial loans. Broadmark Realty’s loans in contractual default was $91.7 million, or 5.7%, of the total loan book at the end of the second quarter. Provisions for credit losses have also ballooned from $58,000 in the second quarter of 2021 to $2.7 million in the most recent reporting period.
Broadmark Realty differs from the majority of REITs in that it has almost no long-term debt on its balance sheet. This enables the trust to make acquisitions using the cash on its balance sheet and eliminating interest expense. The trust is also not very sensitive to the increases in interest rates. Broadmark Realty also has a average loan-to-value of 61%. If a client goes into default, the trust can take possession of the property with equity already built in.
Shares of Broadmark Realty yield a staggering 15.6% at the time of writing, which is more than nine times the average yield of 1.7% for the S&P 500. The trust has a projected payout ratio of 135% for 2022. Therefore, the dividend could be at risk for reduction if the business suffers a setback.
New York Mortgage Trust (NYMT)
The next high-yield REIT to discuss is New York Mortgage Trust (NASDAQ:NYMT). The trust is valued at $873 million and generated revenue of $255 million over the last twelve months.
New York Mortgage Trust specializes in acquiring, financing and managing mortgage-related assets. Unlike many REITs, New York Mortgage Trust doesn’t own actual physical real estate properties. Instead, it owns a portfolio of assets that are related to real estate. The trust’s revenue stream comes from the net interest income and net realized capital gains from its portfolio.
New York Mortgage Trust’s uses investments in mortgage-related assets as the primary way to create interest income, though the trust does maintain some distressed financial assets in its portfolio.
The types of investments found in the portfolio include residential mortgage loans, multi-family commercial mortgage-backed securities, preferred equity, and joint venture equity. The purchase of residential mortgage loans is a relatively new activity for New York Mortgage Trust and could lead to issues in the next recession if mortgage defaults surge.
This could lead to the strong possibility of a dividend cut or suspension. This occurred during the worst of the Covid-19 pandemic as the trust suspended its dividend for part of 2020. Shares yield 17.2%, but the expected payout ratio is 133% for the year.
Sachem Capital (SACH)
The final name for consideration is Sachem Capital (NYSEMKT:SACH). With a market capitalization of just $139 million and revenue of just $41 million over the last year, the trust is one of the smaller REITs in the market place.
Sachem Capital focuses on the origination, underwriting and funding of first mortgage liens that are short-term, typically less than three years. This does protect the trust somewhat from changes in interest rates, as the term of the loan is shorter. Another positive working in the trust’s factor is that each of Sachem Capital’s loans are guaranteed by the borrower through collateral.
Sachem Capital has worked to diversify its business, with a presence in 14 U.S. states. Previously, much of the trust’s business was heavily concentrated in the state of Connecticut. However, Sachem Capital is expanding to large and growing states such as Florida and Texas. The Eastern seaboard is also a focus and could be a key area of growth given the population density of the region. This expansion will reduce the reliance on one major market for business.
Another source of future growth is that it has moved towards originating loans with medium-sized developers with good collateral. This could increase the scale of operations and provide support for the stock’s yield of 15.5%.
If the safest dividend is the one that was just raised thesis is correct, then Sachem Capital’s 17% increase in early July is a good sign for shareholders. The forecasted payout ratio of 100% for the year is the lowest on this list. But that stilll means that the payment is at risk for being reduced if a recession were to occur.
On the date of publication, Bob Ciura did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.