With interest rates falling, the REITs are being forced to settle for far lower yields on their mortgage investments. As mortgage rates fall, so does their income. Mortgage REITs may continue to struggle if rates for new and refinanced mortgages continue to remain low, which at this point, seems likely.
Already, many mortgage REITs have had to cut dividends. In fact, ARMOUR cut its dividend 8% from $0.12 per share each month to $0.11 just a few months ago.
But there could be more cuts on the horizon. Since the start of the year, ARR has announced additional share offerings of 66 million shares. Meanwhile, the share count has risen from 7 million shares to 85 million during the past 18 months.
Risks to Consider: While selling new shares gives the REIT access to cheap capital to invest in more securities, it also dilutes the share base dramatically. At this point, I think the abnormally high yield is the market's way of saying it doesn't believe the current dividend can be sustained with the flood of new shares.
Action to Take: In other words, the 18.6% yield looks nice on paper, but I personally wouldn't buy it right now.
Amy Calistri does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.
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