The bear market in stocks has hurt millions of investors, and those looking for income from their portfolios have taken an especially hard hit. Many companies are looking twice at whether they can sustain their dividend payments, and as share prices fall, rising dividend yields signal worries that dividend payers might choose to reduce or even eliminate their quarterly payouts.
One of the most volatile groups of dividend stocks has been the mortgage REIT industry. These real estate investment trusts that specialize in mortgage-backed securities have come face-to-face with some systemic challenges that have threatened their ability to operate efficiently. Yet recent signs suggest that the worst part of the crisis might finally be in the past. Here, we'll look at what happened and how mortgage REITs might be able to go on.
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Some of the highest yields in the stock market
Mortgage REITs have traditionally boasted high yields, but the stock price declines they've seen have sent their dividend yields sky high. Annaly Capital Management (NLY 1.33%) is one of the best-known companies in the business, and its yield has jumped above 21% based on its most recent quarterly distribution. AGNC Investment (AGNC 0.99%) weighs in with a 17% dividend yield, and Chimera Investment (CIM 2.24%) has seen its yield jump above the 30% mark.
The reason for the soaring yields has been that share prices have fallen following dramatic moves from some smaller players in the business. Invesco Mortgage Capital (IVR 1.98%) said in late March that it wouldn't be able to meet margin calls that its lenders had made, forcing it to seek ways to alter the terms of its credit agreements with its financing companies. In the interim, it chose to delay paying its quarterly dividend that it had declared just a week earlier. That dividend works out to an annual yield approaching 60% -- if it gets paid in full.
Other REITs chose to take action to get ahead of the margin call situation. Two Harbors Investment (TWO 1.93%) sold off its entire portfolio of mortgage-backed securities that weren't issued by government agencies, instead concentrating on the safer agency-backed segment of the market. That cost the company about 55% of its book value during the first quarter of 2020, according to Two Harbors, and that in turn led the mortgage REIT to slash its dividend from $0.40 per share quarterly to make an interim payment of $0.05 per share. Even that's still a 4.5% dividend yield, but it's a far cry from the double-digit percentages that Two Harbors has seen in the past.
What to expect from here
As with many stocks, the prospects for mortgage REITs depend a lot on the future state of the economy. In the years following the financial crisis in 2008 and 2009, Annaly gradually reduced its dividend payment, and its most recent payout was just a third of what it paid at its peak. AGNC has seen a similar two-thirds decline in its payout, although it's gone to a monthly dividend schedule to provide shareholders with more frequent income.
The worst enemy of dividend stock investors is reductions in payment amounts. Unfortunately, it's possible that mortgage REITs will start to rein in their payouts more significantly in light of the unusual conditions in the mortgage-backed bond market.
For now, it looks like mortgage REITs have addressed their most immediate challenge and are taking steps to improve their financial position to handle stressful conditions. However, doing so could cost these high-yield dividend stocks some of their income, putting pressure on their ability to sustain recent payouts. As a result, there might be another shoe to drop before mortgage REITs truly hit bottom.
