When there is uncertainty in the market, it's a good time to think about putting some money into dividend stocks. They may not be as exciting as growth stocks, but they can deliver reliable passive income -- and perhaps keep your blood pressure a bit lower as well.
And if you are looking for dividends, then it's always a good idea to check out real estate investment trusts (REITs). Income investors like to see a company that can sustain a high dividend yield -- that is, the amount of cash it pays shareholders as a percentage of share price -- and REITs must pay out 90% of their taxable income in the form of dividends.
REITs took a bit of a hit during the pandemic, but the three stocks I will talk about today are all in decent shape and all have very high yields right now. Invest $1,000 in one of these or all three of these to diversify and you should easily be able to make close to or more than $100 in annual passive income. Let's take a look.
1. Apollo Commercial Real Estate Finance
Apollo Commercial Real Estate Finance (ARI 2.13%) is largely in the business of originating commercial real estate loans in the U.S. and Europe and has deployed a total of $17 billion of capital since 2009. The largest industries represented in the company's diversified portfolio are office space and hotels, which is a little worrying because the use case for both has been impacted by the pandemic. But the weighted average loan-to-value ratio in the portfolio is 63%, so on average borrowers are putting down 37% of equity; that means they have a strong stake in the properties.
Over the last six quarters, which includes some difficult quarters in 2020, Apollo has managed to generate enough earnings power to cover its large dividend, and management on the company's recent earnings call affirmed their belief that the company will be able to cover its existing dividend run rate in 2022. The company's dividend yield was 10.9% at Wednesday's closing price.
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2. PennyMac Mortgage Investment Trust
Focused on the residential mortgage space, PennyMac Mortgage Investment Trust (PMT 1.83%) is run by PennyMac Financial Services, which generates and services U.S. mortgage loans. After doing a record $4.8 trillion of mortgage originations in 2021, largely driven by refinancings from low rates, management is projecting $3.1 trillion of originations in 2022, which is above pre-pandemic levels.
While the mortgage space is likely to get more difficult as the Federal Reserve raises interest rates, PennyMac does have strategies for hedging these moves, such as its mortgage servicing portfolio, in which it collects mortgage payments for other investors. As interest rates go up and refinancing and prepayments come down, this segment of PennyMac will help offset some of the headwinds in the mortgage space from rising rates.
Management has also affirmed that projected earnings and liquidity this year do support the dividend at current levels. Additionally, the stock currently trades at about 80% book value. The dividend yield is 12.2% at Wednesday's closing price.
3. Ellington Financial
A bit more diversified than the two above, Ellington Financial (EFC 1.74%) invests in residential mortgages, commercial mortgages, asset-backed securities in both sectors, other types of mortgage-backed securities, loan pools, debt and equity investments, and more. This gives Ellington more flexibility in different rate environments, and it's had more consistent returns over the past decade than other hybrid REITs, which shows management's ability to manage the company in different monetary environments.
Management is also well aligned with shareholder interest, with senior management and the board of directors owning 7% of the company, and core earnings have been covering the quarterly dividend.
Ellington currently has a dividend yield of 10.5% and trades a little bit under its book value.
