A rock-solid 10.4% yield
From Marc Lichtenfeld, Editor, Oxford Income Letter:
Generally, mortgage REITs tend to be risky.
They often pay double-digit yields. And any time you’re getting a double-digit yield, the risk is higher.
In recent years, as interest rates have fallen or stayed at extreme lows, mortgage REITs have had to cut their dividends.
Not so with Apollo Commercial Real Estate Finance (ARI).
The stock sports a 10.4% yield, which you should take as a sign of higher risk.
But the dividend is remarkably solid for such a high-yielding stock.
The New York-based company invests in and originates commercial first mortgages.
In the first nine months of 2016, it generated $147 million in net interest income (NII). Net interest income is the best metric for measuring a mortgage REIT’s performance.
It’s the difference between the interest earned and the interest paid on its investments.
In the first nine months of 2016, the company paid out about $95 million in dividends for a payout ratio of 65%.
That gives the company a big buffer if NII were to drop. Even if NII fell by a third, it would still be able to cover its dividend.
As long as there’s so much room between dividends paid and NII, the company can continue to raise its dividend.
NII is expected to grow sharply in 2017. It should rise about 25% – to $250.2 million – from $200.7 million in 2016.
If the company pays the $123.6 million in dividends that Wall Street expects this year, its payout ratio will drop to 61.5%.
This will give the company an even larger comfort zone to raise its dividend.
Apollo Commercial Real Estate Finance has hiked its dividend three times since 2010 and twice since December 2014. It’s never cut its dividend since it began paying one seven years ago.
Mortgage REITs can be volatile. But a rising interest rate environment is often positive for them.
With rising NII, a low payout ratio and a strong history of paying the dividend, Apollo Commercial Real Estate Finance’s dividend is as safe as you’ll find for a mortgage REIT.
Dividend Safety Rating: A
Crux note: Marc and his team recently uncovered a little-understood income investment that politicians have been using for years to safely amass fortunes in the stock market. Learn all about it in this presentation.