Two Harbors Funding (NYSE: TWO) is a 14-year-old New York-based mortgage actual property funding belief (REIT). It invests in residential mortgages.
The inventory has an enormous 17% dividend yield, which is kind of enticing to revenue traders. However can traders depend on the yield staying that giant going ahead?
Once we analyze mortgage REITs, we use a metric referred to as web curiosity revenue (NII). Mortgage REITs borrow cash after which lend it out at a better rate of interest. NII is the distinction between how a lot the corporate earns in curiosity (minus bills) and the way a lot it pays in curiosity.
Sadly for Two Harbors, its NII has been evaporating.
Since 2019, the corporate’s NII has plummeted 86%. And this 12 months’s NII is forecast to drop one other 63% from final 12 months’s whole.
This might be an enormous drawback with regards to paying the corporate’s dividend.
Final 12 months, Two Harbors paid shareholders greater than $290 million in dividends – that’s practically eight instances more money than it introduced in.
To say that’s unsustainable could be like saying San Francisco is a bit untidy nowadays – a dramatic understatement.
Although the dividend has been reduce just lately, Two Harbors remains to be projected to pay out $232 million in dividends this 12 months, although NII is predicted to return in at lower than $14 million.
Unsurprisingly, as NII has fallen, so has the corporate’s dividend.
Two Harbors has reduce its dividend 5 instances over the previous 10 years.
Contemplating the corporate’s dismal document of sustaining its dividend and its putrid NII efficiency, not solely is the dividend unsafe, however one other dividend discount is a certain factor.
Dividend Security Score: F
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