This 12% Yielder Pays Investors 12 Times a Year
One Monthly Dividend Stock to Think About
This has got to be one of the most interesting dividend stocks on the market.
The company has a generous dividend policy that translates to an annual yield of 12% at the current share price. It also happens to follow a monthly distribution schedule. In other words, investors who own this stock today get to collect a one percent cash return every month.
To put that in perspective, the average S&P 500 company only provides a 1.9% dividend return every year. (Source: “S&P 500 Dividend Yield,” Multpl.com, last accessed September 24, 2019.)
The company in question is ARMOUR Residential REIT, Inc. (NYSE:ARR), which, as the name suggests, is a real estate investment trust (REIT) specializing in the residential segment. But instead of owning apartment buildings, ARR focuses on the mortgage side of the residential real estate business.
Headquartered in Vero Beach, Florida, ARMOUR Residential REIT invests primarily in residential mortgage-backed securities (RMBS) that are issued or backed by government-sponsored entities such as the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), or the Government National Mortgage Association (Ginnie Mae).
As of August 31, RMBSs that are backed by these government agencies accounted for 92.3% of ARR’s total investment portfolio. (Source: “ARMOUR Residential REIT, Inc. Company Update,” U.S. Securities and Exchange Commission, September 13, 2019.)
By having a portfolio of agency RMBSs, the company can generate a predictable stream of interest income. Then it passes that income to investors through regular dividend payments.
On September 24, ARMOUR Residential announced that it plans to pay a monthly cash dividend of $0.17 per share for its common stock in October 2019. With ARR stock trading at $16.96 per share, that comes out to a 12% annual yield. (Source: “ARMOUR Residential REIT, Inc. Announces Expected October 2019 Dividend of $0.17 Per Common Share,” ARMOUR Residential REIT, Inc., September 24, 2019.)
Of course, given that this yield is higher than what most companies are offering, investors can’t help but wonder whether the payout is safe.
To find out the answer, let’s take a look at the financials.
ARMOUR Residential REIT, Inc. Financials
ARMOUR Residential REIT last reported earnings on July 24. It showed that, in the second quarter of 2019, the company generated core income, including drop income, of $41.9 million, or $0.63 per share. (Source: “ARMOUR Residential REIT, Inc. Reports Financial Results for the Quarter Ended June 30, 2019,” ARMOUR Residential REIT, Inc., July 24, 2019.)
ARMOUR defines core income, including drop income, as “net income excluding impairment losses, gains or losses on sales of securities and early termination of derivatives, unrealized gains or losses on derivatives and certain non-recurring expenses, plus drop income.”
Considering that the company paid total dividends of $38.5 million ($0.57 per share) for the second quarter, its core net income, including drop income, provided more than enough coverage for the payout.
Looking back, you’ll see that the REIT’s core income has exceeded its dividends for 12 consecutive quarters.
Still, ARR stock is not perfect. In particular, while the company offers a generous dividend policy and has managed to outearn its payout, its current payout level is actually the result of a dividend cut.
You see, in the second quarter of 2019, ARMOUR Residential stock was paying monthly dividends of $0.19 per share. Starting in the third quarter, the company has been paying monthly dividends of $0.17 per share, representing a 10.5% decline. (Source: “Dividends,” ARMOUR Residential REIT, Inc., last accessed September 24, 2019.)
Now, you are probably wondering why the company decided to cut the dividend when it was still covering its payout.
Well, in the company’s second-quarter earnings conference call, Co-Chief Executive Officer Jeff Zimmer provided an answer:
However, as prepayments increased, the amount of amortization expense increased quite a bit. And the funding rates, despite the fact that there is a certain — almost certain feeling for a Federal Fund’s rate cut, did not lower themselves. So as a result, today you have a fed funds seven to eight basis points above LIBOR, and you have prepayment rates that are still high.
So we saw that coming with our portfolio characteristics and we want to cut the dividend to a point that reflects the amount that we believe we’re earning.
(Source: “ARMOUR Residential REIT, Inc. (ARR) CEO Jeff Zimmer on Q2 2019 Results – Earnings Call Transcript,” Seeking Alpha, July 25, 2019.)
Therefore, like most double-digit yielders, ARMOUR Residential REIT, Inc. is not the safest dividend stock. But for those who understand the underlying risks, the company’s generous monthly dividends could be worth a look.