Passive income stream or performance trap

What if it were possible to generate annual dividend income of 10%, 20% or more in a real estate investment trust (REIT)? 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 risk in the market. An investor could earn a 12% dividend, only to see their stock drop 20% that year. That first dividend is nice, but what if the company cuts next year’s dividend by 55%?

Here are some examples of REITs with extremely high dividends and the performance risks they have shown in the past.

Orchid Island Capital Corp. (NYSE: ORC) is a finance company that invests in U.S. residential securities backed by mortgage loans. The Florida-based company launched an IPO in March 2013 at a price of $14.50. And since inception, it has paid a monthly dividend of $0.135 for an approximate annual return of 11%.

Investors who bought ORC at the IPO price luckily earned an even bigger dividend yield the following year, when ORC increased its dividend to $0.18 per month. But in 2015, the company abruptly cut the dividend to $0.14 a month, where it remained for two years. In 2018, it further reduced the monthly dividend to $0.11, and then several cuts followed over the years until it reached the current dividend amount of $0.045 per month.

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

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

ARR boasts a current dividend yield of over 16%. But given the company’s history, is it worth the risk? Most investors would run away from this high-risk stock.

Office Properties Income Trust (NASDAQ: OPI) is a Massachusetts-based real estate company that owns, leases and manages office space. Many of its tenants are stable and their portfolio even includes government offices. And yet, in September 2018, OPI was a $48 stock with a 14% dividend yield. It still has a dividend yield of 12.2%. However, OPI closed today at $18.02. It takes a lot of dividend payments to make up for the 62% loss in stock value in just four years.

What makes OPI so dangerous is that it has seen revenue and earnings per share (EPS) decline over the past three years. In fact, Q2 2022 EPS was negative $16 million. In volatile markets, investors want to see increased revenue and EPS. So they avoid stocks like OPI, even if the dividend yields are attractive.

Investors should do their homework before buying any REIT stock, but that’s especially true when looking at one with such a high dividend yield. Such stocks are often market laggards that even strong dividends can’t overcome.

Highlights of today’s real estate investment news

  • The real estate investment platform backed by Bezos Homes arrived launched a new batch of offers to allow retail investors to buy shares in 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 completed a new investment in a portfolio of four apartment buildings consisting of 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 annual cash return of 7.02%.

Find more real estate investment news and deals at Benzinga Alternative Investments

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