Monthly dividend stocks may be appealing for investors who are not afraid to accept higher risk, explains Bob Ciura, contributing editor of Sure Dividend — as we conclude this special 5-part feature on high yield stocks with monthly payments.
Many monthly dividend stocks have extremely high yields. This makes them susceptible to dividend reductions during economic downturns, but their high yields and monthly dividends are attractive for income investors.
For example, Orchid Island Capital (ORC) has a 19.0% dividend yield, and it makes dividend payments each month. With a dividend yield this high, investors should assess whether the dividend is sustainable.
Business Overview & Recent Events
Orchid Island Capital, Inc. is a Real Estate Investment Trust, or REIT, operating in the mortgage industry. Mortgage REITs differ from most other REITs. For example, traditional REITs typically own a portfolio of physical real estate, which they lease to tenants to collect rental income.
Mortgage REITs are purely financial entities, and Orchid Island does not own any physical properties. Instead, it is an externally managed REIT (by Bimini Advisors LLC) that invests in residential mortgage-backed securities (RMBS), either pass-through or structured agency RMBSs, which are financial instruments that collect cash flow based on residential loans such as mortgages, including subprime, and home-equity loans.
On April 28th, 2022 Orchid Island Capital reported Q1 results. The company reported a Q1 net loss of $148.7 million. Net interest income increased to $39.2 million from $24.9 million year-over-year. Total expenses stood at $4.7 million. Moreover, net realized and unrealized losses stood at $183.2 million on RMBS and derivative instruments, including net interest expense on interest rate swaps.
Meanwhile, Q1 total return stood at (19.5%) while book value per common share stood at $3.34. The company also reported net portfolio loss of $144.03 million compared to $25.88 million net portfolio loss in the year-ago period. Finally, Orchid Island Capital had $0.155 per common share of total dividends declared and paid in Q1.
Dividend Analysis
The growth outlook for mortgage REITs is challenged. Mortgage REITs make money by borrowing at short-term rates and lending at longer-term rates, then pocketing the difference. This is referred to as the spread, which is how Orchid Capital generates its cash flow.
When the spread between short-term rates and long-term rates compresses, profitability erodes at a rapid pace. This is why mortgage REITs can be dangerous if the yield curve flattens.
In addition, while the dividend yield is sky high, the payout record has been inconsistent. After bumping the dividend to $0.18 per month in late 2013, Orchid Island paid this dividend rate for 19 months before undergoing a series of dividend reductions. Still, shares currently yield 19%, an extremely high payout level. With a projected dividend payout ratio of 81% for 2022, the current payout level appears sustainable, albeit with a high level of risk.
