Beware: These 5 REITs May Be Yield Traps- Expert Analysis

Beware: These 5 REITs May Be Yield Traps- Expert Analysis

A yield trap is a stock that currently pays a very attractive dividend yield but will likely need to cut its dividend soon.

Beginner investors often make the mistake of choosing stocks simply based on high dividend yields, but these are often yield traps with a high risk of dividend cuts. When dividends are cut, the investor suffers the double whammy: lower prices and a lower dividend.

Investors can reduce the risk of purchasing a yield trap by focusing on two key factors: the relationship between earnings and dividends paid (the payout ratio) and the history of reducing, suspending or increasing the dividend. company dividend. If the dividend paid is greater than the profits generated, a dividend reduction becomes likely.

Take a look at six real estate investment trusts (REITs) that are at high risk of becoming yield traps based on one or both of the key factors cited.

Global Net Lease Inc. (NYSE:LNG) is a New York-based diversified net lease REIT founded in 2011. Its portfolio of more than 1,296 properties covers 66.8 million square feet in 11 countries. It benefits from a rental rate of 96% and a weighted average remaining lease term of 6.8 years. Properties in the United States and Canada make up 80% of Global Net Lease’s portfolio, with a further 20% in Europe.

Global Net Lease pays a quarterly dividend of $0.35 and the annualized dividend of $1.40 currently yields 19%. But the dividend was cut from $0.53 to $0.40 per share in April 2020, and then again to $0.35 per share in October 2023. With forward funds from operations (FFO) of just 1 $.09, the payout ratio of 130% is too high to be sustainable. FFO has also declined in five of the last six quarters, so the decline in fundamentals is a huge red flag for investors.

Orchid Island Capital Inc. (NYSE:ORC) is a Vero Beach, Florida-based mortgage financing REIT that acquires, invests in, and provides financing from U.S. residential mortgage-backed securities.

Orchid pays a monthly dividend of $0.12 per share and the annualized dividend of $1.44 now yields 16.64%. But over the past five years, the dividend has been cut five times.

Additionally, Orchid has generated negative earnings per share (EPS) in five consecutive quarters and recorded four consecutive quarters of negative revenue. Orchid therefore pays $1.44 in annual dividends while earning $0.25 per share. These numbers won’t work for long.

Orchid is at extremely high risk of having to cut its dividend again, and investors should not be fooled by the high dividend rate.

Ares Commercial Real Estate Corp. (NYSE:ACRE) is a New York-based mortgage REIT that originates and invests in commercial real estate loans and other investments in the United States. Ares was incorporated in 2011.

Ares Commercial pays a quarterly dividend of $0.25 per share, but the dividend was reduced from $0.35 to $0.33 in September and then again to $0.25 per share in February.

The $1 annualized dividend yields 13.27%, but don’t count on that yield remaining this high in the future when forward EPS is just $0.17 per share.

Dynex Capital Inc. (NYSE:DX) is a Glen Allen, Virginia-based mortgage REIT that invests in mortgage-backed securities (MBS) on a leveraged basis. The fair value of its portfolio is $7.4 billion. Dynex was incorporated in 1987.

Dynex Capital pays a monthly dividend of $0.13 per share. To its credit, the dividend has been stable since June 2020. However, the dividend was cut in August 2019 and May 2020. And the annualized dividend of $1.56 per share does not cover the forward EPS of negative 0.12 $ per share. Dynex has experienced four consecutive quarters of negative EPS and revenue.

The 12.27% dividend yield is enticing, but this REIT is a potential yield trap best avoided.

Generation Income Properties Inc. (NASDAQ:GIPR) is a Tampa, Florida-based diversified REIT that owns 26 single-tenant properties, including net lease retail, office and industrial properties in densely populated areas. Seventy-two percent of its tenants benefit from investment-grade credit or equivalent. Generation Income is still a small company founded in 2015 and went public in 2021.

Generation Income pays a monthly dividend of $0.039, and the annual dividend of $0.468 currently yields 12.58%. The dividend was reduced from $0.54 per share to $0.39 per share in October 2022.

In addition to the dividend cut, this is another REIT with four straight quarters of negative FFO. The annualized dividend rate of $0.47 is unsustainable with a negative forward FFO of $0.22.

While each of the preceding REITs may pay an attractive dividend once or twice in the future, the potential for further dividend cuts and/or stock price declines is too obvious to ignore. Investors should consider looking for better options, even if dividend yields are lower.

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