NRZ Stock: An 11.15% Yield That’s Actually Safe
1 High-Yield Stock You Likely Haven’t Considered
Due to the U.S. Federal Reserve’s ultra-low interest rate policy, finding safe high-yield stocks has been a challenge for the past several years. Think about it: if a company pays rock-solid dividends with an attractive yield, investors will likely jump on the opportunity. With increased buying activity, the yield would no longer be that high.
Does that mean income investors have to settle for a low dividend yield? Not necessarily. Over the last several months, a unique high-yield stock has caught my attention: New Residential Investment Corp (NYSE:NRZ).
Headquartered in New York City, New Residential Investment is a mortgage real estate investment trust that focuses on residential real estate. The company currently pays quarterly dividends of $0.50 per share, giving it an annual yield of 11.15%.
In an era where the average S&P 500 company pays less than two percent, a double-digit yielder like New Residential Investment could go a long way towards boosting the return of an income portfolio.
Of course, if yield is the only criterion, investors would be chasing companies that pay 20%, and even 30%, but they are not doing that. The reason is simple: high-yield stocks are not known for their dividend safety. And buying a double-digit yielder before its dividend is cut can turn into a very expensive lesson.
The good news is, New Residential Investment is one of the few 10%-plus yielders that actually have solid financials to back their payouts. In the third quarter of 2017, the company generated core earnings of $0.64 per diluted share while paying $0.50 of dividends per share. That translates to a payout ratio of 78%, leaving a sizable margin of safety. (Source: “New Residential Announces Third Quarter 2017 Results,” New Residential Investment Corp, October 27, 2017.)
The company’s payout has been growing too. In 2017 alone, New Residential Investment has raised its quarterly dividend rate twice. (Source: “Dividends,” New Residential Investment Corp, last accessed November 23, 2017.)
And the best could be yet to come. The biggest component of New Residential Investment’s portfolio is mortgage servicing rights (MSRs). MSRs include the right to collect mortgage payments from the borrowers and forward them to the lenders. Some banks process mortgage payments themselves, but some choose to transfer MSRs to companies like New Residential Investment. In return, the servicer gets paid a fee for processing the mortgage payments.
As of September 30, 2017, New Residential Investment had $2.25 billion in mortgage servicing rights. These investments have a targeted lifetime net yield of 12% to 18%. (Source: “New Residential Quarterly Supplement,” New Residential Investment Corp, last accessed November 23, 2017.)
The neat thing about MSRs is that they not only provide a steady revenue stream, but also tend to increase in value as interest rate goes up. This is because in a rising interest rate environment, mortgages underlying the MSRs are less likely to be refinanced, therefore extending the life of the servicing fee stream.
In other words, New Residential is one of the few high-yield instruments that can actually benefit from an increase in interest rates. Adding in its impressive current yield, NRZ is a ticker worth checking out for every income investor.