Orchid Island Capital (ORC) | Monthly Dividend Safety Analysis

Up to date on April twenty fifth, 2022 by Felix Martinez

Traders are probably aware of the usual Actual Property Funding Trusts, or REITs. Most REITs personal bodily actual property, lease the properties to tenants, and derive rental earnings which is used to pay dividends.

However there’s a totally different set of REITs that traders is probably not as aware of: mortgage REITs. These REITs don’t personal bodily properties, however fairly purchase mortgage securities.

Mortgage REITs usually have a lot greater dividend yields than customary REITs, however this doesn’t essentially make them higher investments.

For instance, Orchid Island Capital (ORC) is a mortgage REIT, with a particularly excessive dividend yield of 18.6%. Orchid Island pays dividends every month, which supplies it the compelling mixture of a a excessive yield with month-to-month dividend funds. It is without doubt one of the 50 month-to-month dividend shares.

You’ll be able to obtain our full Excel spreadsheet of all month-to-month dividend shares (together with metrics that matter like dividend yield and payout ratio) by clicking on the hyperlink beneath:

Orchid Island has an exceptionally excessive dividend yield and is without doubt one of the highest-yielding shares that we cowl.

Nonetheless, the outlook for mortgage REITs is challenged, and Orchid Island’s dividend yield should not be sustainable even after a number of dividend cuts previously a number of years.

This text will focus on why earnings traders shouldn’t be lured by Orchid Island’s extraordinarily excessive dividend yield.

Enterprise Overview

Whereas conventional REITs personal a portfolio of properties, mortgage REITs are purely monetary entities. Orchid Island is an externally-managed, specialty finance firm. Orchid Island invests in residential mortgage-backed securities, both pass-through or structured company RMBSs.

Supply: Investor Presentation

An RMBS is a debt instrument that collects money flows, based mostly on residential loans akin to mortgages, home-equity loans, and subprime mortgages. Mortgage-backed securities are an funding product representing a basket of pooled loans.

As traders noticed first-hand throughout the 2008 monetary disaster, mortgage-backed securities could be extremely risky and dangerous. That stated, mortgage REITs have been among the many greatest winners as rates of interest have been falling throughout the aftermath of the Nice Recession.

Progress Prospects

Mortgage REITs generate profits by borrowing at short-term charges, lending at long-term charges, and pocketing the distinction, or the unfold between the 2.

When the unfold between short-term charges and long-term charges compresses, profitability erodes. Because of this mortgage REITs could be harmful if short-term rates of interest are about to extend.

Which the rates of interest are about to extend this 12 months and sure subsequent 12 months. Due to this, the inventory value for ORC has fallen 36.7% 12 months thus far.

Orchid Island has not been capable of produce significant progress previously a number of years. The corporate has skilled excessive earnings volatility over the previous a number of years, with a internet loss in 2013 and 2018, together with a number of years by which the belief barely generated a revenue.

Orchid Island’s incapacity to carry out effectively with rates of interest at zero makes it unlikely that the belief can regain its footing as rates of interest began to rise.

On February 24th, 2022 Orchid Island Capital reported This autumn outcomes for 2021. Internet interest earnings got here in at $42.4 million, up 77.4% from $23.9 million 12 months–over–12 months. For the 12 months, e book worth per share declined 20.5% year-over-year to $4.34. The firm additionally reported internet realized and unrealized losses of $82.6 million on RMBS and spinoff devices, together with internet curiosity expense on rate of interest swaps for 4Q2021.

Supply: Investor Presentation

Dividend Evaluation

Orchid Island’s eroding fundamentals have triggered a big drop in its dividend funds to shareholders previously a number of years.

Orchid Island presently pays a month-to-month dividend of $0.045 per share, which is 30% decrease than the identical month-to-month payout stage from one 12 months in the past. It additionally decreased its dividend earlier this 12 months. Thus, the corporate has had two dividend cuts this 12 months. Orchid Island’s dividend payout nonetheless stays beneath the $0.08 per share month-to-month dividend it was paying in early 2020.

Wanting again additional, Orchid Island’s month-to-month dividend payout reached a excessive of $0.18 per share in 2014, however has been lowered a number of occasions since then.

On an annualized foundation, the belief has a present dividend payout of $0.54 per share. Primarily based on its current closing value, the inventory affords an 18.6% dividend yield. It is a big dividend yield, contemplating the typical dividend yield of the S&P 500 Index is presently beneath 1.5%.

Nonetheless, there are too many pink flags for Orchid Island to be thought-about a beautiful funding, together with the belief’s a number of dividend cuts over the previous few years and inconsistent profitability in that point.

As well as, Orchid Island has issued shares at a excessive tempo in recent times. Whereas the belief lowered its shares excellent 7.4% in 2018, Orchid Island’s share depend has skyrocketed since 2013. This comes at a steep price to shareholders, within the type of heavy dilution.

With a risky dividend historical past, Orchid Island shouldn’t be an interesting selection for traders in search of regular dividend payouts from 12 months to 12 months.

Orchid Island inventory seems to be the definition of a yield lure. Whereas the inventory’s persistently excessive yield could lure earnings traders, complete annualized returns previously 5 years have been detrimental 1.7%, even when together with dividend funds.

The inventory has badly lagged the S&P 500 Index, and we imagine this underperformance is prone to proceed.

Supply: Investor Presentation

Closing Ideas

Sky-high dividend yields could be deceiving. Orchid Island’s practically 18.6% dividend yield is engaging, however this inventory has all of the makings of a yield lure.

The belief has a large quantity of debt on the stability sheet, and is issuing shares at an alarming tempo. The outlook for mortgage REITs has improved in recent times as a consequence of low-interest charges, however that is now altering because the FED will probably be growing the rates of interest. Nonetheless, Orchid Island’s efficiency remained poor throughout the low-interest charges surroundings. The belief’s most up-to-date quarter confirmed enchancment in internet curiosity earnings, however a decline in per-share e book worth.

Orchid Island has minimize its dividend a number of occasions previously few years as a consequence of poor basic efficiency. Traders ought to tread very rigorously with mortgage REITs like Orchid Island. Because of this, earnings traders can be higher served shopping for higher-quality dividend shares, with extra sustainable payouts.