Who doesn’t love dividend stocks? Especially if those dividends come from prosperous solid companies which keen to deliver dividend to their shareholders for as long as they stick with them. One way to see dividends is as free money, is there something better than that? If you also love dividend stocks, this article is for you, keep reading.
Dividend stocks are companies that pay out a portion of their earnings to a class of shareholders on a regular basis. These companies usually are well established, with stable earnings and a long track record of distributing some of those earnings back to shareholders. The distributions are known as dividends and may be paid out in the form of cash or as additional stock.
Most dividends are paid out on a quarterly basis, but some are paid out monthly, annually, or even once in the form of a special dividend. While dividend stocks are known for the regularity of their dividend payments, in difficult economic times, those dividends may be cut to preserve cash.
- Annaly Capital Management Inc. (NLY)
Annaly Capital Management is a diversified capital management company that invests in and finances residential and commercial assets. Its investments include agency mortgage-backed securities (MBS), residential real estate, and middle market lending. The company has about $93 billion in total assets.2 On Sept. 9, Annaly announced a common stock cash dividend of $0.22 per common share for Q3 2021. This dividend is payable Oct. 29 to shareholders of record as of Sept. 30, 2021.
Annaly is effectively yielding 10%, and has averaged a roughly 10% payout for the past two decades. In other words, this isn’t a flash-in-the-pan high-yield. Since it was founded in 1997, Annaly’s payout has consistently been many multiples higher than the benchmark S&P 500.
The mortgage REIT operating model is pretty straightforward. Companies like Annaly are looking to borrow money at lower short-term lending rates and use their capital to purchase higher-yielding long-term assets, such as residential mortgage-backed securities (RMBS). The goal is to widen the company’s net interest margin — the difference in average yield received from RMBSs minus the average borrow rate — as much as possible. As I said, it’s a pretty cut-and-dried business model.
What really matters for Annaly Capital Management is interest rates, and in this respect, everything looks to be working in its favor. Annaly usually performs poorly when the yield curve is flattening (i.e., the difference between long-term and short-term Treasury yields shrinks) and/or the Federal Reserve is undertaking big changes to its federal funds rate and monetary policy.
On the other hand, when the yield curve is steepening and the nation’s central bank is walking on eggshells with regard to monetary policy changes, Annaly performs well. During the early years of an economic recovery, we’re almost always in this favorable scenario.
- New Residential Investment Corp. (NRZ)
New Residential Investment invests in the residential housing sector. The company owns mortgage servicing-related assets, residential loans, and similar investments. New Residential Investment announced on Aug. 23 that it had completed the acquisition of mortgage originator and servicer Caliber Homes Loans Inc. The deal was initially announced on April 14, 2021. The company said it planned to bring together the mortgage platforms of Caliber and Newrez LLC, which is New Residential’s wholly owned mortgage originator and servicer, Newrez LLC. The acquisition is expected to add a roughly $150 billion unpaid principle balance of mortgage servicing rights (MSRs), technological enhancements, and other benefits. Terms of the deal were not disclosed in the announcement
New Residential has three main areas of operation: mortgage investing, servicing, and origination. I recently wrote about New Residential’s servicing portfolio and how it could help mitigate the effects of the Federal Reserve’s impending reduction in asset purchases. But investors also need to know about New Rez’s mortgage origination business.
New Residential has been beefing up its mortgage origination business, and recently completed its purchase of Caliber Home Loans. This transaction puts New Rez in the top five nonbank lenders in the U.S., and on a pro forma basis it funded $45 billion in origination in the second quarter.
Unlike mortgage REITs, mortgage originators generally trade well above book value, especially those that interact primarily with the borrower, as opposed to those who purchase completed loans from smaller lenders. Mortgage REITs rely mainly on interest income, but originators have the ability to make a loan, sell it, and make another.
- AGNC Investment Corp. (AGNC)
Want a value stock that’s a bit more off-the-radar than a giant pharmaceutical stock? Take a gander at mortgage real estate investment trust (REIT) AGNC Investment Corp. (NASDAQ:AGNC).
Although the mortgage-REIT industry might seem complicated, given the various classifications of securities they carry in their portfolios, this industry can be quickly demystified in a single sentence. Mortgage REITs are simply looking to borrow capital at lower short-term lending rates, which can then be used to purchase higher-yielding long-term assets, such as mortgage-backed securities (MBS).
The difference between the average yield received from the MBS that a mortgage REIT holds, minus its average borrowing rates, is known as its net interest margin. The wider the net interest margin, the more profit potential for mortgage REITs.
The current place in the economic cycle in the U.S. makes AGNC particularly intriguing. Traditionally, a flattening yield curve — a situation where the gap between short-term and long-term Treasury yields is declining — and/or a swift-moving Federal Reserve are bad news for mortgage REITs. Conversely, a steepening yield curve and a slow-moving central bank are a recipe for book-value expansion for companies like AGNC Investment Corp.
Another factor working in AGNC’s favor is the company’s focus on agency-backed MBS. Agency securities are backed by the federal government in the event of default. Although this added protection lowers the yield AGNC receives from its MBS, it also allows the company to lever its bets in order to boost profitability.
The bottom line for investors is they can buy shares of AGNC Investment right now for about six times next year’s forecasted earnings and 9% below its book value. With a 9.1% dividend yield to boot, it checks all the boxes for value (and income) investors.
- TFS Financial Corporation(TFSL)
TFS Financial Corporation’s TFSL board of directors has approved a 0.9% increase in the company’s quarterly dividend to 28.25 cents per share from 28 cents per share. The hiked dividend will be paid on Sep 21, to stockholders of record as on Sep 7, 2021.
TFS Financial announced its first quarterly dividend in February 2008. However, the company suspended dividend payments from 2010 to 2014 due to some regulatory issues. Later, management resumed dividend payments in September 2014. Notably, the dividend of 10 cents per share rewarded by the company in August 2015 marked the biggest amount announced by TFS Financial since it went public in 2007.
TFS Financial’s capital-deployment activities look impressive. While the company’s ongoing eighth repurchase program, with the $10-million authorization, had earlier been suspended as part of the response to the pandemic, the same was reinstated in February 2021.
During the nine-month period ended Jun 30, 2021, the company did not repurchase any shares of its common stock. In total, 4,108,921 shares were repurchased under that program since its commencement in January 2017 through Jun 30, 2021.
Nonetheless, the company continues to focus more on dividends in its capital-deployment evaluation.
The company’s shares have dipped 2.7% in the past six months, against the industry’s rise of 0.6%
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