Two Harbors: Currently Offering a Dividend Yield of 10.57%
Two Harbors is a Top Dividend Stock
Buying and holding shares is one way to generate wealth over the long term. The longer you hold the investment, the lower the risk involved and the greater upside to the company’s assets. You also won’t need to time the market and try to guess the price to purchase and sell a stock at. Yes, there are other ways to generate a profit faster, but, with those, one bad trade could wipe out all the gains that have been accounted for.
To remove the doubt from unpredictable capital gain, investors should consider dividend-paying stocks. These investments pay out income on a regular basis, so more time in the investment means more money paid out. The total return also factors in both the income and capital gain.
One reason a company has a dividend is to attract long-term shareholders, creating the highest value possible, which takes time. This usually entails the stock having lower volatility and greater preservation of capital. And of course, they can only afford to pay a dividend if cash flow holds steady.
That established, let’s now take a look at a company that pays a high dividend yield and offers an additional return via stock price appreciation. I’m talking about Two Harbors Investment Corp (NYSE:TWO). Here’s why.
Sounds too good to be true? Let me explain.
Two Harbors finances and manages residential mortgage-backed securities (RMBS), mortgage servicing rights, and commercial real estate assets. Investors are biased towards agency RMBSs, which are investments backed by the government, since they offer lower risk.
Two Harbors is a real estate investment trust (REIT), which comes with benefits such as tax breaks. In return, 75% of the company’s capital must be invested in real-estate-related assets, and 90% of its cash flow must be put toward the dividend. This high allocation helps keep management in line, controlling spending.
Get Paid to Wait
TWO stock is offering a dividend yield of 10.57%, or $1,057 annually. Assuming there is no change to the dividend or stock price, the total capital would be returned from the initial investment in less than 10 years.
But TWO stock won’t be staying the same; it’s getting better, thanks to constant growth. In this case, there have been three dividend hikes over the past six quarters. Staying in the stock also means the yield will gradually increase over time, as will the return on capital.
In order to determine whether a company is selling at a cheap valuation, compare it to its industry peers. Anything that impacts the economy or a specific industry will impact all companies in the same manner. Businesses in the same industry also tend to have the same range of margins and revenue trends.
However, even with such similarities, the valuation of the companies’ stocks will not necessarily be in the same trading range. For instance, TWO stock currently has a price-to-earnings (P/E) ratio of 6.6 times, which is only about one-tenth of the industry average ratio of 65.4 times.
I believe that the reason the market isn’t big on this company because its return on equity and assets are too in line with the industry average, and its margins are only slightly higher than that of its peers. If investors knew about this cheap stock’s high dividend, the P/E ratio would be seeing a higher valuation.
Bottom Line on TWO Stock
It’s not every day that a cheap-valued stock is found in today’s marketplace, especially one with a high dividend yield. Until others clue in on this dividend-paying gem, TWO stock could provide you a high dividend yield.