Alternative Investment

Passive Income Stream Or Yield Trap – Are High Dividend REITs Worth The Risk?

What if it was possible to make 10%, 20% or more in annual dividend income on a real estate investment trust (REIT) stock? Does the idea of a double-digit dividend yield conjure up images of a new sports car, yacht or mansion? Well, not so fast. REIT stocks with double-digit dividend yields are among the highest risks on the market. An investor could earn a 12% dividend, only to see their stock drop 20% in that year. That first dividend is nice, but what if the company cuts the next year’s dividend by 55%?

Here are a few examples of REITs with ultra-high dividends and the performance risks they’ve demonstrated in the past.

Orchid Island Capital Corp. ORC is a finance company that invests in U.S. residential mortgage-backed securities. The Florida-based company initiated an IPO in March 2013 at a price of $14.50. And from the very beginning, it paid a monthly dividend of $0.135 for an approximate annual yield of 11%. 

Investors who bought ORC at the IPO price happily captured an even larger dividend yield the following year when ORC raised the dividend to $0.18 per month. But in 2015, the company abruptly cut the dividend back to $0.14 per month, where it remained for two years. In 2018, it further reduced the monthly dividend to $0.11, and then several more cuts ensued over the years until reaching the current dividend amount of $0.045 a month. 

Along with the dividend, the price has also declined considerably over time. Today, ORC shares are only $2.88. So an investor who bought at the IPO would have lost 80% of the stock’s value while collecting smaller and smaller dividends over the years.

ARMOUR Residential REIT Inc. ARR is a mortgage REIT that, five years ago, went for $26.50 and paid $0.19 quarterly dividends for the next two years. But like ORC, the quarterly dividend was cut to $0.17 in 2019 and then slashed to $0.10 in 2020. In five years, the stock has also declined to a current price of $7.36. Some of the problems with ARR are poor cash flow, negative earnings and revenue issues. And it would appear that the long-term dividend is rarely safe with this stock.

ARR boasts a current dividend yield of over 16%. But given the company’s history, is it worth taking a chance? Most investors would run from this high-risk stock.

Office Properties Income Trust OPI is a Massachusetts-based real estate company that owns, leases and manages office space. Many of its tenants are solid, and their portfolio even includes government offices. And yet, in September 2018, OPI was a $48 stock with a 14% dividend yield. It still sports a 12.2% dividend yield; however, OPI closed today at $18.02. It takes a lot of dividend payments to make up for a 62% loss of stock value in only four years.

What makes OPI so risky is that it has produced declining revenue and earnings per share (EPS) over the past three years. In fact, in Q2 of 2022 EPS was a negative $16 million. In volatile markets, investors want to see increased revenue and EPS. So they shun stocks like OPI, even if the dividend yields are attractive.

Investors should do their homework before buying any REIT stock, but that’s especially true when considering one with such a high dividend yield. Such stocks are often market laggards which even strong dividends fail to overcome.

Today’s Real Estate Investing News Highlights

  • The Bezos-backed real estate investment platform Arrived Homes launched a new batch of offerings to allow retail investors to purchase shares of single-family rental homes with a minimum investment of $100. The platform has already funded over 150 properties with a total value of over $50 million. 

  • The CalTier Multi-Family Portfolio Fund recently completed a new investment in a portfolio of four multi-family properties consisting of 185 units. The CalTier Multi-Family Portfolio Fund is one of the few non-traded real estate funds available to non-accredited investors and has a minimum investment of $500. Year to date, the fund has produced an annualized cash-on-cash return of 7.02%.

Find more news and real estate investment offerings on Benzinga Alternative Investments

Image by William Potter on Shutterstock

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