Dividend stocks can be an excellent source of passive income, and Rithm Capital (RITM +0.54%) is one of the highest-yielding dividend stocks you can buy today. Its 9.1% dividend yield makes it an appealing stock for investors looking to generate income from their portfolios, and the stock trades at a reasonable valuation. However, it is undergoing a transformation that could affect its high dividend yield. Here's what you need to know if you're considering buying Rithm Capital today.
NYSE: RITM
Key Data Points
Rithm Capital has struggled due to higher interest rates
Rithm Capital is a mortgage real estate investment trust (REIT) that focuses on mortgage servicing rights. As a REIT, Rithm Capital enjoys a pass-through tax structure, meaning it doesn't pay taxes at a corporate level. Instead, it must pay out 90% of its taxable income to shareholders through dividends, which is why REITs can be quite attractive for income-focused investors.
Rithm differs from mortgage REITs because its portfolio includes businesses in the real estate sector to complement its mortgage-backed securities and loans portfolio. Its holdings include the Newrez residential mortgage origination unit and business lending specialist Genesis, along with mortgage servicing rights, single-family rentals, and loans.
Mortgage REITs are sensitive to changes in interest rates. For example, over the past few years, mREITs have struggled as the Federal Reserve raised interest rates several times. As a result, mortgage-backed securities have underperformed as interest rate volatility rose, leading to declining book value per share in the short term.
The company is making a big push into alternative asset management
Rithm Capital is making significant changes to its underlying business model. In 2022, the company rebranded from New Residential to Rithm Capital to reflect its shifting business model as it pursues becoming an alternative asset manager instead of a pure mortgage REIT company.
Rithm is working toward becoming an alternative asset manager, which it believes will create more value for its shareholders in the long term. The company sees itself being structured more like Blackstone or Ares Management, which means it may eventually convert from a REIT to a traditional corporation.
The alternative asset space has exploded in popularity as wealthier investors and institutions seek assets outside traditional finance to boost returns. According to the investment data company Preqin, global alternative assets under management (AUM) are expected to reach $24 trillion by 2028, representing an 8.4% annual growth rate.
As part of its transformation, Rithm acquired Sculptor Capital Management for $630 million last year. The acquisition accelerates Rithm's capabilities in the asset management sector by giving it nearly $33 billion in assets under management across credit, real estate, and multi-strategy platforms. It also acquired Computershare's mortgage servicing business for $720 million, which gives it another $136 billion in unpaid principal balance of mortgage servicing rights.
Its dividend could eventually get cut
Rithm Capital is transforming, which could be a good thing for the company. After all, mortgage REITs have struggled, and over the past five years, Rithm's total return (including reinvested dividends) was a measly 9%.
By diversifying into alternative asset management, Rithm is entering a fast-growing industry with a solid runway for further growth. However, this transformation means that there may be more big changes coming. For example, it could convert from a REIT to a traditional corporation, which would be bad news for investors drawn to the stock for its high dividend payout.
Today, the stock trades at a slight discount to book value, and the company recently announced a $300 million share repurchase plan to buy back what management sees as an undervalued stock.
RITM Price to Book Value data by YCharts
Is it a buy?
Rithm is an intriguing company, and I'm interested in seeing how it can progress in the alternative asset space. If it changes its business structure, its big dividend yield could be a thing of the past, so income investors may want to avoid the stock if that's their goal.
However, if Rithm successfully builds up its alternative assets business, it'll open up a new steady stream of fee-based cash flow, which will help it grow its earnings in the long term. If you're OK with a potentially lower dividend payout in the future, you can take a chance on Rithm's transformation at a pretty reasonable valuation today.
