I love dividend stocks. My favorites are those that offer juicy yields. I prefer a higher payout because it enables me to generate more passive income, putting me closer to my goal of reaching financial independence.
Given my preference for income, I'm always looking for new high-yielding dividend stocks to add to my portfolio. One that recently caught my attention was Rithm Capital (RITM 0.25%) and its 9.2%-yielding payout. However, after looking at the company, I wouldn't touch it with a 10-foot pole. Here's why I won't add the high-yielding real estate investment trust (REIT) to my portfolio.
NYSE: RITM
Key Data Points
Trying to get a feel for the rhythm
Rithm Capital isn't your average REIT. The company launched over a decade ago as New Residential Investment Corp, a mortgage REIT focused on mortgage servicing rights. Since then, it has grown quite a bit, expanding its asset base more than tenfold from $3 billion to over $30 billion. It has also evolved into a more diversified financial services and real estate company. That evolution led to its 2022 rebranding to Rithm Capital.
The company recently took the next step in its evolution, acquiring Sculptor Capital Management for roughly $720 million. The transformational transaction will expand the company's capabilities in the alternative asset management sector. Sculptor brings significant third-party capital to the platform, with over $30 billion in assets under management (AUM). The company expects the acquisition to be accretive to its earnings starting next year. Meanwhile, it sees tremendous growth opportunities by combining platforms.
The Sculptor transaction was one of several acquisitions the company has made in recent months as it works to sculpt Rithm 2.0. It also bought Computershare Mortgage Services for $720 million and a $1.4 billion portfolio of unsecured consumer loans from Goldman Sachs' Marcus division.
A complex REIT
One of my concerns with Rithm Capital is that it's becoming more complex and less like a REIT with each deal. It seems to be following in the footsteps of leading alternative asset managers like Brookfield Corporation and KKR. Like Brookfield and KKR, it invests capital from its balance sheet to earn a return for shareholders. On top of that, it will also now manage third-party investors' capital through Sculptor.
However, while asset management can be a great business model, I'm not sure it's an ideal fit for a REIT. There are strict guidelines that REITs must follow to remain in compliance with IRS regulations, including investing 75% of their total assets in real estate or cash and getting at least three-quarters of their gross income from real estate sources. As Rithm expands into non-real estate segments, it risks not generating enough income to qualify as a REIT. For example, while Sculptor has a meaningful real estate business (over $4 billion in AUM), its credit and multistrategy platforms are much larger.
Another REIT qualification is that it must pay 90% of its taxable net income to investors in dividends. If Rithm were to find the REIT structure too constraining for its continued expansion outside of real estate, it could convert into a regular taxable corporation. If that were to happen, Rithm would likely reduce its juicy payout, which would allow it to retain more cash to reinvest in its continued expansion. The company has already cut its payout in the past and hasn't increased it since 2021.
Rithm's big-time dividend might not last
Rithm Capital has evolved over the years. It has become a much more complex financial services company that's looking less like a REIT with each deal it makes. Because of that, I'm unsure how long it will continue paying its big-time dividend. Since generating sustainable (and growing) income is a key aspect of my investment strategy, I wouldn't touch a stock with so much uncertainty surrounding the future of its dividend.
