Get a 11% Yield with this Mortgage REIT

Jay Peroni, Lead Analyst, CEO and FounderBlog (Members), Blog (Public), Dividend Income Investing

A High Yield Income Stock for Your Radar

Over the last few decades the residential mortgage loan industry has grown increasing complex.  There are significant investment opportunities in the $21 trillion U.S. residential housing market. Since the U.S. financial crisis in 2007-2009, the residential mortgage industry has undergone a significant overhaul as originating, own, and servicing of loans has changed dramatically. These changes have led to a new set of investment opportunities.

Real Estate Investment Trusts (REITs)

Real estate investment trusts (REITs) are a prime alternative for investors seeking diversification and passive income without the burdens of sole ownership.  Mortgage REITs deal in investment and ownership of property mortgages. These REITs loan money for mortgages to owners of real estate, or purchase existing mortgages or mortgage-backed securities. Their revenues are generated primarily by the interest that they earn on the mortgage loans.

Investors own common shares in a REIT, but one wrinkle distinguishes a REIT from a corporation: a REIT must pay out 90% of its operating profits as dividends, which are taxed as ordinary income. REITs have performed well through up and down markets: U.S. REITs averaged yearly returns of 16.7% from 1975-2006 compared to 12.2% for the S&P 500. As recently as 2014, the total return of the FTSE NAREIT All REITs Index almost doubled the S&P’s return (27.2% to 13.7%). In 2015, its total return was 2.3% versus the S&P’s 1.4% advance.

Let’s take a look at an exciting high yield opportunity in this area…

A High Yield Play in the Residential Real Estate Market

Company:                 New Residential Investment Corp (NRZ)

Industry:                   Real Estate

Sector:                        REIT – Residential

Dividend:                 $1.92 annually per share

Yield:                           11.37%

Dividend Growth: Raised dividends for 3 straight years. 243% Dividend Growth over past 4 years.

Dividend Safety:    Grade A

Profile:  New Residential Investment Corp. (NYSE: NRZ) is a publicly traded real estate investment trust (“REIT”) that focuses on investing in, and actively managing, investments primarily related to residential real estate.

New Residential Investment Corp, is a real estate investment trust. It is engaged in investing in, and managing, investments related to residential real estate.  It aims to drive strong risk-adjusted returns primarily through investments in (i) Excess Mortgage Servicing Rights (“MSRs”), (ii) Servicer Advances, (iii) non-Agency residential mortgage backed securities (“RMBS”) and associated call rights.


Reasons to Buy

  • New Residential Investment Corp. focuses on producing stable long-term cash flow and maintaining a conservative capital structure. It primarily invests in Excess Mortgage Servicing Rights (MSRs), Servicer Advances and non-Agency residential mortgage-backed securities (RMBS) so it has some stability that come with an attractive yield (currently over 11%).
  • Has seen decent earnings growth (expected 5.8% annual earnings growth) along with strong sales growth (expected 48.3% annual sales growth).
  • New Residential Investment has paid dividends for 16-straight quarters and raised its dividend payout amount each year over the past 3 years.  Better yet, its has grown its dividend by 243% over the past four years.

5 Point Stock Inspection

  1. Earnings Trend: Grade A
  • Solid Earnings Growth Trend, solid Momentum, and a history of Surprises
  • Positive Analyst Earnings Revisions
  • Earnings growth last quarter greater than 20% over same quarter last year
  1. Financial Health: Grade A
  • Stronger financial profile than 73.22% of stock universe
  • Solid Sales Growth: Healthy 5-year growth
  • Operating profit margin is greater than industry average
  • Net profit margin greater than industry average
  • ROE is north of 15%
  1. Momentum: Grade C
  • Medium Momentum
  • Relative Strength is 72 out of 100
  • Stock up almost 50% over past 12 months
  1. Risk: Grade B
  • Average risk
  • Beta in line with market (0.96)
  • Has lower risk profile than 80.21% of stock universe
  1. Valuation: Grade B
  • Forward P/E at 7.27, is less than industry average
  • Good buy under $17/share

Overall:  Grade A

Bottom Line

New Residential Investment Corp. (NRZ) is a solid choice if you are looking for high yield and stability.  It is in a growing industry and has a well diversified business.


Additional Reading:

Fixed Income Challenges & Opportunities

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While Dual Returns has used reasonable efforts to obtain information from reliable sources, we make no representations or warranties as to the accuracy, reliability, or completeness of third-party information presented herein. The sole purpose of this analysis is information. Nothing presented herein is, or is intended to constitute investment advice. Consult your financial advisor before making investment decisions.