Passive Income Stream or Yield Trap – Are High Dividend REITs Worth the Risk?


What if it was possible to earn 10%, 20% or more in annual dividend income on a real estate investment trust (REIT) stock? Does the idea of ​​a double-digit dividend yield conjure up images of a new sports car, yacht or mansion? Well, not so fast. REIT stocks with double-digit dividend yields are among the highest risks in the market. An investor could earn a 12% dividend, only to see their stock drop 20% that year. That first dividend is fine, but what if the company cuts next year’s dividend by 55%?

Here are some examples of REITs with ultra-high dividends and the performance risks they have demonstrated in the past.

Orchid Island Capital Corp. CRO is a financial company that invests in residential mortgage-backed securities in the United States. The Florida-based company launched an IPO in March 2013 at a price of $14.50. And from the start, it paid a monthly dividend of $0.135 for an approximate annual return of 11%.

Investors who bought ORC at the IPO price fortunately captured an even bigger dividend yield the following year when ORC raised the dividend to $0.18 per month. But in 2015, the company abruptly cut the dividend to $0.14 per month, where it stayed for two years. In 2018, it further reduced the monthly dividend to $0.11, then several more reductions followed over the years until it reached the current dividend amount of $0.045 per month.

Along with the dividend, the price has also dropped significantly over time. Today, ORC shares are only $2.88. So an investor who bought in the IPO would have lost 80% of the stock’s value while collecting smaller and smaller dividends over the years.

ARMOR REIT Residential Inc. ARR is a mortgage REIT that five years ago was worth $26.50 and paying quarterly dividends of $0.19 for the next two years. But like ORC, the quarterly dividend was cut to $0.17 in 2019, then cut to $0.10 in 2020. In five years, the stock has also fallen to a current price of $7.36. Some of the issues with ARR are poor cash flow, negative earnings, and revenue issues. And it would seem that the long-term dividend is rarely safe with this title.

ARR enjoys a current dividend yield of over 16%. But given the company’s history, is it worth taking a chance? Most investors would shun this high-risk stock.

Office Property Income Trust OPI is a Massachusetts-based real estate company that owns, leases and manages office space. Many of its tenants are solid and their portfolio even includes government offices. And yet, in September 2018, OPI was a $48 stock with a 14% dividend yield. It still sports a dividend yield of 12.2%; however, OPI closed today at $18.02. It takes a lot of dividend payouts to offset a 62% loss in stock value in just four years.

What makes OPI so risky is that it has produced declining revenue and earnings per share (EPS) over the past three years. In fact, in the second quarter of 2022, EPS was negative $16 million. In volatile markets, investors want to see an increase in revenue and EPS. They therefore avoid stocks like OPI, even if the dividend yields are attractive.

Investors should do their homework before buying REIT shares, but that’s especially true when considering one with such a high dividend yield. These stocks often lag the market, which even strong dividends fail to overcome.

Highlights of today’s real estate investing news

  • The real estate investment platform supported by Bezos Homes arrived launched a new batch of offerings to allow retail investors to buy shares of single-family rental homes with a minimum investment of $100. The platform has already financed over 150 properties with a total value of over $50 million.
  • The CalTier Multi-Family Portfolio Fund recently made a new investment in a portfolio of four multi-family properties comprising 185 units. The CalTier Multi-Family Portfolio Fund is one of the few non-traded real estate funds available to non-accredited investors and has a minimum investment of $500. Year-to-date, the fund has produced an annualized cash-on-cash return of 7.02%.

Find more real estate investment news and offers on Benzinga Alternative Investments

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