When evaluating a dividend stock, there are several things to consider. How much is the dividend? How frequently is it paid? What is the payout ratio, meaning what percentage of earnings goes to the dividend? What is the yield rate -- i.e. the percentage of the share price that's paid out annually?

It's also important to look at the dividend trend. What trajectory is it on? Does it continually go up, or has it declined or stayed flat over the years? If the latter, what underlying problems are causing the dividend to decline?

These are some of the questions that will help you discern a good dividend stock from one that's not so good.

Let's apply this thinking to Orchid Island Capital Inc. (NYSE:ORC). Would it be a solid dividend stock in your portfolio, or is it one you should overlook?

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Orchid Capital is having a rough year

Orchid Island Capital is a Vero Beach, Florida-based specialty finance company that invests in residential mortgage-backed securities, primarily agency MBS like Fannie Mae, Freddie Mac, or Ginnie Mae. It is managed by Bimini Advisors, a subsidiary of Bimini Capital Management, which is a registered real estate investment trust, or REIT. Orchid Island is also a REIT and has a market cap of about $367 million.

The stock trades at about $6.15 per share and has had a rough year. The stock price is down 12% over the trailing 12 months as of Jan. 10. The average stock price for a mortgage REIT was up about 9.6% in 2019, according to NAREIT. So Orchid Island was obviously an underperformer.

Orchid Island pays out a dividend of $0.08 per share per month, which calculates to an annualized payout of $0.96 per share. That generates a yield rate of 16.5%, which would be considered very high for a typical stock. But consider that REITs typically pay out yield rates this high and higher, as the tax laws they operate under require them to payout 90% of taxable earnings to shareholders. 

There are a couple of concerns, though. First, Orchid's monthly dividend has been on a downward trend the past few years. Since 2013, the dividend has declined from $0.18 a share to the current $0.08 -- a 55.6% drop in payouts. That's not a trajectory that investors want to see.

Dividend trap in the making

Another red flag is the company's payout ratio, which is extremely high at 117%. The payout ratio is the percentage of earnings paid out as dividends.

A high payout ratio might seem great on its face, but when it's too high -- in the case of REITs that would be 100% or more -- then it's a problem. A payout ratio over 100% means that the company is paying out more than it takes in, and that's not sustainable. That means the dividend will eventually have to go down, particularly if the company's earnings aren't strong.

This brings us to Orchid's earnings. The company reported a net loss of $8.5 million in the quarter, or $0.14 per share, compared to the third quarter of 2018. Net interest income dropped $13.6 million, while net portfolio losses fell $19.4 million. This was due in large part to the successive interest rate cuts in the third quarter. It also has a high debt ratio. 

With questionable fundamentals and a mortgage market that is not expected to improve much (if at all) in 2020, Orchid Island may have a hard time getting things moving in the right direction. Don't look for any positive change in the dividend and don't count this stock as a great dividend stock.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.