3 choices for more dividends with big discounts

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We like to shop in this market today. Yields are excellent and there are always new choices.

Petar Chernaev/E+ via Getty Images

Prepare for graphs, images and tables, because they speak louder than words. Ratings and outlook we emphasize here come after Scott Kennedy’s Weekly Updates in the FPI Forum. Your continued feedback is greatly appreciated, so please leave a comment with any suggestions.

I have three choices to share with investors today. The first is New York Mortgage Trust (NYMT). It is one of the high risk mortgage REITs, but it is worth mentioning. The shares are trading at a significant discount to book value. Using our current book value estimates, the price-to-book ratio should be around 0.72. It’s quite significant in historical terms.

Book value per share has declined over time, but the decline occurred during the pandemic. Other than that, the decline was usually quite gradual:

New York Mortgage Trust share price and book value

The REIT Forum

If we turn price and net asset value (same as book value here) into a ratio, it would look like this:

Price-to-book chart for New York Mortgage Trust

The REIT Forum

This makes the ratio today quite cheap. We’ve seen these stocks trade above book value often before the pandemic and they’ve been trading at over 90% of book value for most of 2021. If stocks go back up to that point, it would give investors a significant capital gain. The shares also have a dividend yield of 13%, so investors are paid while waiting for that appreciation. However, as a high-risk common stock, we just don’t want to forget about it. We like to take an active approach to these opportunities.

Sheet showing the main investment parameters for shares of New York Mortgage Trust

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Preferred shares

Don’t like the common stock angle on NYMT? How about going up in the capital pile. I’m happy to use preferred stock. NYMTZ (NYMTZ) offers investors a massive stripped yield of 8.63%. The shares are fixed rate, so they will not fluctuate if interest rates rise or fall. While many investors like the idea of ​​a floating rate, I also want to keep some fixed rate stocks in the portfolio. If interest rates stagnate and fall over the next few years, fixed-rate stocks could be a home run.

Some investors will assume that the REIT will simply repurchase the shares after the call protection ends (early 2027), but the shares are only $20.58 today. If shareholders exist at $25.00 at all times, they get a huge capital gain on top of the stripped return of 8.63%. I like huge capital gains, so this works well for me. If I can get a big dividend yield and that much upside while being higher in the capital stack, that’s a good position. While investors are generally concerned about the economy today, I don’t think the situation is serious enough to warrant these stocks trading at $20.58. Should they be less than $25.00? Most likely. But there is a huge gap between $25.00 and $20.58.

I’m going to launch another preferred stock pick for investors who want the floating rate. MFA-C (MFA.PC) at $21.49 also offers a substantial increase in appeal value. If the shares are called when the call protection ends and the floating rates take effect (3/31/2025), the call yield would have been 13.1%. It’s a clear win no matter how you look at it. Assuming no call, investors still saw a discounted 7.56% return on the stock in the meantime. It’s not huge, but it’s certainly not bad. In this “no call” scenario, the floating rate could be a big advantage if interest rates continue to rise. If the shares were floating today, they would have returned 8.41%. If short-term rates are at 2.5%, the floating yield on today’s price would be just over 9.1%.

If the floating yield is lower because prices are higher, investors who bought today would have nothing to complain about since they would have locked in the lower price.

Between MFA-C and NYMTZ, investors consider a position that would win with higher rates and another that would win with lower rates. I find both values ​​attractive and own shares of MFA-C and NYMTZ.

All the most important metrics investors should consider when analyzing a preferred stock

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Investment Parameters for the Second Preferred Stock

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I will have another article coming up for readers to discuss GPMT-A. We recently added the preferred stock to our charts and released an exclusive report on GPMT-A for REIT Forum subscribers.

The rest of the charts in this article may be self-explanatory for some investors. However, if you want to know more about them, we encourage you to check out our notes for the series.

Table of actions

We’ll end the rest of the article with the charts and graphs we provide to readers to help them follow the common stock and preferred stock industry.

We include a quick table for common stocks that will be displayed in our tables:

Let the pictures begin!

Residential Mortgage REIT Charts

Note: The chart in our public articles uses the book value per share from the last earnings release. The current estimated book value per share is used to achieve our trading objectives and decisions. It is available in our service, but these estimates are not included in the tables below.

Residential Mortgage REIT Price-to-Book Ratio Chart

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Residential Mortgage REIT Dividend Yield Table

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Residential Mortgage REIT Income Yield Chart

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Source: The REIT Forum

Charts of Commercial Mortgage REITs

Commercial Mortgage REIT Price-to-Book Ratio Chart

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Commercial Mortgage REIT Dividend Yield Chart

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Commercial Mortgage REIT Earnings Yield Chart

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BDC Charts

BDC Price-to-Book Table

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BDC Dividend Yield Chart

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BDC Earnings Performance Chart

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Preferred Share Charts

Preferred Share Price Comparison Chart

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Preferred Share Stripped Yield Comparison Chart

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Preferred Share Floating Yield Comparison Chart

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preferred stock price comparison for higher risk stocks

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comparison of preferred stock stripped return for higher risk stocks

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comparison of preferred stock float yield for higher risk stocks

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Preferred Share Data

Beyond the charts, we also provide our readers with access to several other metrics for preferred shares.

After testing a preferred stock series, we decided to try merging it with the common stock series. After all, we are still talking about positions in mortgage REITs. We don’t want to cover preferred stocks without cumulative dividends, so all of the preferred stocks you see in our column will have cumulative dividends. You can verify this using Quantum Online. We have included the links in the table below.

To better organize the table, we needed to abbreviate the column names as follows:

  • Price = Recent Stock Price – Shown in Charts
  • BoF = Bond or FTF (Fixed-to-Floating)
  • S-Yield = Stripped Yield – Shown in Charts
  • Coupon = Initial Fixed Rate Coupon
  • FYoP = Floating Yield on Price – Shown in Charts
  • NCD = Next Call Date (nearest stocks could be called)
  • Note: For all FTF issues, the floating rate would start at NCD.
  • WCC = Worst Cash to Call (lowest possible net cash yield from a call)
  • QO Link = Link to Quantum Online Page

Second batch:

Strategy

Our goal is to maximize total returns. We achieve this most effectively by including “trading” strategies. We routinely trade positions in common stocks of mortgage REITs and BDCs because:

  1. Prices are inefficient.
  2. Over the long term, stock prices generally revolve around book value.
  3. Short-term price-to-book ratios can deviate significantly.
  4. The book value is not the only step in the analysis, but it is the cornerstone.

We also allocate preferred stocks and equity REITs. We encourage buy-and-hold investors to consider using more preferred stocks and equity REITs.

Performance

We benchmark our performance against 4 ETFs that investors could use to gain exposure to our sectors:

Performance Comparison of Best Service REIT on Seeking Alpha with MORT, PFF, VNQ and KBWY

The REIT Forum

The 4 ETFs we use for the comparison are:

Teleprinter

Exposure

DEAD

One of the largest mortgage REIT ETFs

PFF

One of the largest preferred stock ETFs

VNQ

Largest Equity REIT ETF

KBWY

The REIT high-yield equity ETF. Yes, it was appalling.

When investors think it’s not possible to get strong returns with preferred stocks or mortgage REITs, we politely disagree. The sector is full of opportunity, but investors still need to beware of risk. We can’t just aim for performance and hope for the best. With respect to common stocks, we must be even more vigilant in protecting our capital by regularly monitoring prices and updating estimates of book value and price targets.

Ratings:

  • Common Stock Bull: NYMT
  • Preferred Stock Bull: NYMTZ, MFA-C
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