Two Mortgage REITs Yield More Than 16%. Their Share Prices Tell Another Story
Five popular income stocks are flashing warning signs that most yield-chasing investors overlook until after the dividend cut. Here is what the coverage ratios, leverage levels, and share price histories actually reveal about each one.
Two of the largest mortgage REITs now offer forward yields above 16%. That happened after their share prices fell more than 12% in a single month: 12.59% for one and 13.17% for the other. A high yield is only worth as much as the company’s ability to keep it. All five of these income names show at least one warning sign that owners should watch.
What makes a dividend unsustainable: the payout uses up most or all of the right earnings measure for that business, free cash flow falls short of it, or new debt and new shares are paying for it. We spelled out the full set of red flags in a free dividend trap guide if you want the full checklist before reading on.
AGNC Investment: A 16% Yield With Little Room to Spare
GAAP earnings at a mortgage REIT jump around with bond prices, so the better test is distributable earnings against the dividend. AGNC Investment (NASDAQ:AGNC) earned $0.40 per share in Q2. Its dividends for the quarter came to $0.36, which works out to about 90% of earnings. At $8.76, the $0.12 monthly payout gives a forward yield of about 16.4%, which puts it in ultra-high-yield territory.
Much of that yield comes from the stock’s decline. The stock is down 9.57% year to date. The annual dividend equals about 16.8% of tangible book value of $8.58 per share. Liabilities total $109.22 billion against $12.54 billion of equity. AGNC also sold 16.2 million new shares through its at-the-market program, which dilutes existing holders. The company cut the monthly payout from $0.16 to $0.12 in April 2020.
To keep the payout whole, AGNC needs mortgage spreads to stay steady and rate moves to stay calm. Q2 was encouraging, with a 6.7% economic return.
Annaly Capital: A Fresh Raise Sits on Thin Coverage
Annaly Capital Management (NYSE:NLY) reported earnings available for distribution (EAD) of $0.79 per share. That covers its $0.75 quarterly dividend at about 95%. EAD has exceeded the dividend for the ninth consecutive quarter, and management raised the payout from $0.70. At $18.29, the forward yield comes to about 16.4%.
A margin of 4 cents a share leaves little room for error at 7.4x GAAP leverage. The stock is down 9.19% year to date, so a lower share price is doing part of the work behind the yield. The dividend history includes cuts from $0.30 to $0.25 in 2019 and from $0.88 to $0.65 in 2023.
Book value rose to $20.15 from $19.82 during the quarter.
Kraft Heinz: A Flat Payout Backed by Shrinking Sales
Using adjusted numbers, Kraft Heinz (NASDAQ:KHC | KHC Price Prediction) covers its $1.60 annual dividend. Full-year EPS guidance of $2.03 to $2.09 means the payout takes about 79% even at the bottom of the range. Management guided to free cash flow conversion of about 110%. GAAP results look much worse: trailing diluted EPS is -$2.87 after a $7.4 billion impairment. At $22.77, the forward yield is about 7.0%.
That yield is mostly the result of a falling stock. Shares are down 58.79% over ten years. Net sales fell 1.4%, and North American adjusted operating income dropped 15.8%. Organic sales are guided to decline 0.5% to 2.0% this year. Brand spending is rising to about $700 million, and the planned break-up is paused. The dividend has stayed flat at $0.40 a quarter since it was cut from $0.625 in 2019.
Management paid down $1.9 billion of debt in the quarter, and the CFO said “Our balance sheet remains very strong.” To keep the payout safe, the extra marketing spend needs to bring volume back.
AT&T: The Mildest Warning on the List
AT&T (NYSE:T) expects free cash flow of $18 billion or more, and adjusted EPS guidance of $2.25 to $2.35 covers its $1.11 dividend well. Management did say that buybacks plus dividends will use “essentially 100% of our outlook for free cash flow.” The forward yield of about 4.95% makes it high-yield. It falls short of ultra-high.
Leverage of 2.68x net debt to EBITDA is above the 2.5x target and is expected to rise to the 3.2x range after the EchoStar deal. Legacy EBITDA fell about 46%, and the shares are down 12.88% in a month. AT&T cut its dividend once before, from $0.52 to $0.2775 in 2022. If cash gets tight, buybacks could be scaled back before the dividend is touched.
Yield Alone Is Never a Buy Thesis
A dividend cut usually drags the share price down with it, so income investors take two losses at once. Before trusting a yield, check coverage on the right earnings base, free cash flow, and leverage. For owners of these five stocks, the next few quarterly reports will show whether coverage is holding up or getting lower.
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Chris Lange is a financial and geopolitical writer with more than a decade of experience covering a myriad of topics. He has published thousands of articles for 24/7 Wall St., with past coverage focused heavily on stocks, IPOs, healthcare, defense, global affairs, and technology.
His work has been quoted, or referenced by a number of outlets including Business Insider, USA Today, Yahoo Finance, MSN, The Motley Fool, and many other publications. A graduate of Southwestern University, he studied business with a focus on investments and has previous experience in banking and startups.
When not reading or writing the news, he is following his passion for Lacrosse, playing chess, or building solar projects with his dad.
