Is This Monthly Dividend Stock’s 8.8% Yield Safe?
Should Income Investors Consider This Monthly Dividend Stock?
For income investors, few things are better than a high-yield monthly dividend stock. But as is the case with any dividend-paying company, there’s no guarantee that the dividend payments will continue indefinitely into the future. So in this article, let’s take a look at one of the highest-yielding monthly dividend stocks in today’s market and examine its dividend safety.
The company in question is ARMOUR Residential REIT, Inc. (NYSE:ARR), a real estate investment trust (REIT) headquartered in Vero Beach, Florida.
Unlike many REITs that own physical properties, ARMOUR specializes in real estate mortgages. In particular, the company invests in agency residential mortgage-backed securities. These are securities issued or guaranteed by a United States Government-sponsored entity, including the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the Government National Mortgage Administration (Ginnie Mae).
By investing in a portfolio of mortgage backed securities, ARMOUR can collect interest and principal payments from the underlying mortgages. The company then distribute some of that income to shareholders in the form of dividends. Right now, ARMOUR pays monthly dividends of $0.19 per share, giving ARR stock an annual yield of 8.8%.
With investments that are backed by government agencies, you might think that the ARMOUR’s payout is safe. But unfortunately, that hasn’t really been the case.
Consider this: in the beginning of 2012, ARR stock was paying monthly dividends of $0.88 per share. Today, the amount stands at just $0.19 per share. That’s a drop of 78.4%.
The chart below shows ARMOUR’s per share annual payout for the last six years:
ARR Stock Dividend History
Source: “Dividends,” ARMOUR Residential REIT, Inc., last accessed December 28, 2017.
Obviously, income investors want rising payouts. The above chart provides exactly the opposite of what we want to see.
With a much lower dividend rate, is the payout safe for now?
Well, in the third quarter of 2017, ARMOUR Residential REIT generated core income of $32.6 million, or $0.69 per diluted share. This was more than enough to cover the $0.57 of dividend per share the company declared and paid during this period. (Source: “ARMOUR Residential REIT, Inc. Reports Financial Results for the Quarter Ended September 30, 2017,” ARMOUR Residential REIT, Inc., October 25, 2017.)
However, the company has to deal with a major challenge going forward: rising interest rates. Even though ARMOUR Residential REIT uses interest rate swaps to hedge part of the interest rate risk, it still has a net balance sheet duration of 1.17. This means if interest rates increase by one percent, the value of the company’s assets will drop by approximately 1.17%. (Source: “Company Update,” ARMOUR Residential REIT, Inc., December 14, 2017.)
In December 2017, the U.S. Federal Reserve raised the target range for the federal funds’ rate by a quarter point to 1.25% to 1.5% and has hinted at as many as three rate hikes for 2018. This would not be good news for ARR stock investors.
At the end of the day, a company that has cut its payout before wouldn’t be shy to do it again when things go south. Even though ARMOUR Residential REIT’s yield looks attractive, I would rather stand on the sidelines for now.