The U.S. mortgage market has minted countless millionaires. Some investors took out mortgages directly, buying up properties that eventually became worth much more than their original purchase price. Others took out bets against the mortgage market, accumulating small fortunes during the 2008 financial crash.
Today, some believe one controversial mortgage-related stock has a lucrative upside. Shares can potentially deliver big gains both today and far into the future.
Is Rithm Capital (RITM 0.81%) the next millionaire-maker stock?
Get this 9% dividend immediately
The first thing most investors notice about Rithm's stock is that it offers a 9% dividend yield. The S&P 500's dividend yield, for comparison, is a paltry 1.5%.
By investing $1,000 in Rithm stock, you'll begin earning about $90 in dividends every year. And that's not including any potential upside to the stock price, which we'll get to momentarily.
How can Rithm offer such a high dividend?
Once a subsidiary of Fortress Investment Group, Rithm was created in 2013 to handle its parent company's mortgage-servicing rights business. Mortgage-servicing rights include everything related to keeping a mortgage up and running. In exchange for handling all the day-to-day administrative aspects of servicing a mortgage, companies like Rithm collect regular fees. That creates a consistent cash-flow stream that can then be redirected to shareholders in the form of dividends.
Now an independent company, Rithm no longer focuses solely on mortgage-servicing rights. The company has invested heavily in building out additional capabilities. It is now involved directly in the mortgage industry, owning not only the mortgage servicing rights but also the underlying mortgages themselves. Last year, Rithm acquired Sculptor, an asset manager focused on real estate and credit markets -- areas that Rithm's management team understands quite well.
Note that Rithm's dividend payment hasn't always been reliable. In early 2020, the company slashed the payout due to pandemic uncertainty. Meanwhile, as the company expands into different business lines, there might not be a clear link between its revenue model and distributable cash flow. Rithm could still succeed as a business, but a dividend yield of 9% may not be a permanent aspect of its future.
To be sure, the current dividend has been sustained for more than two years now, but don't buy this stock for the dividend alone. There's a different reason investors should be interested.
The shares trade at an unusual discount
For most of Rithm's history, the shares traded at or above book value -- an accounting metric used to gauge the net value of a company's assets. Today, the shares trade at a 10% discount to their historical averages. Is this a rare buying opportunity?
Rithm stock currently trades at a discount for two important reasons. First, housing affordability is at a multiyear low. According to data from the National Association of Realtors, a mortgage payment for the median home today uses about 25% of the median family's household income. That's up from just 17% in 2021. If borrowers find it more difficult to pay their mortgages, Rithm will be directly affected. The value of its mortgage assets might fall, and it may have fewer active mortgages it can service.
The second reason Rithm stock trades at a discount is related to the uncertainty behind its new business model. Despite a stock price that has moved sideways since 2013, the company has managed to pay enough dividends to produce positive shareholder returns over that period.
Can the company continue these positive returns as a more diversified business? Rithm has relatively minimal experience running a multibillion-dollar asset-management business. The company's ability to succeed in its current form is questionable, and a discount on the stock seems justifiable, given this lack of clarity.
Is Rithm a millionaire-maker stock?
Sure, Rithm stock delivers an impressive dividend, and the shares trade at an unusual discount, but make no mistake: Rithm is very likely not a millionaire-maker stock.
Mortgage servicing rights are traditionally a sleepy business. Although the company's recent expansion into other business lines could provide newfound growth, asset management isn't considered a high-growth opportunity. At best, the company will continue its existing dividend policy, the current book value discount will narrow, and these new business lines will help a struggling share price.
This combination of events would make Rithm stock a buy. However, there's no reason to believe that shares will turn a small investment into millions over the coming years and decades.
