Two Dividend Hikes in Less Than a Year
This company pays a 12.2% dividend and has raised its payout twice so far this year.
I’m looking at New Residential Investment Corp (NYSE:NRZ), a real estate investment trust (REIT) headquartered in New York City.
Most REITs are in the business of owning some type of properties, such as retail malls and office buildings. They collect rent from tenants and distribute some of the proceeds to shareholders in the form of dividends.
While New Residential is structured as a REIT, its main business is not about owning physical properties. Instead, the company makes money by investing in mortgages.
To be more specific, New Residential invests in excess mortgage servicing rights, service advances, non-agency residential mortgage-backed securities, and associated call rights.
I know, that is quite a list of jargon, and I’m not going to go over the details of every one of them. Instead, I’m going to focus on one specific type of investment that New Residential has put increasing emphasis on—mortgage servicing rights, or MSRs.
Here’s how MSRs work. When you get a mortgage to buy a house, you will be making mortgage payments—which includes both interest and principal—to the lender. If the lender doesn’t want to process the mortgage payments themselves, they can transfer the mortgage servicing right to another company. The company with the MSR will then be processing the remaining mortgage payments for a fee.
New Residential has been growing its MSR portfolio. In the second quarter of 2017, the company bought MSRs totaling approximately $115.0 billion in unpaid principal balance. (Source: “New Residential Quarterly Supplement,” New Residential Investment Corp, last accessed September 13, 2017.)
Servicing mortgages can be a very lucrative business. As a servicer, New Residential is paid a servicing fee, which is a percentage of the principal value of the mortgage. And, based on the price that New Residential paid for these servicing rights, the company expects its MSR portfolio to have a lifetime net yield of between 12% and 18%.
This lucrative business model allows the company to return a generous amount of cash to shareholders. Paying $0.50 per share on a quarterly basis, NRZ stock has an annual dividend yield of 12.2%.
nattanan23/Flickr
The Best Is Yet to Come?
Here’s the best part: interest rates are rising, which could be a huge catalyst for the company’s massive MSR portfolio.
You see, when interest rates increase, the prepayment rate usually drops, and the expected cash flows of mortgages increase. This would extend the life of the servicing fee stream and cause the value of MSRs to rise.
In fact, the company’s financials are already improving. In the second quarter of 2017, New Residential generated $356.8 million of net interest income, which more than doubled the $176.8 million from the year-ago period. Diluted earnings came in at $1.04 per share, providing ample coverage of the $0.50 of dividends declared during this period. (Source: “New Residential Announces Second Quarter 2017 Results,” New Residential Investment Corp, July 31, 2017.)
Improving financials could lead to an even bigger payout down the road. As a matter of fact, New Residential has raised its quarterly dividend rate twice so far into 2017.
That’s why for investors looking for a high yield stock that also offers dividend growth potential, New Residential should be near the top of their watch list.
Also Read:
REIT ETF List: Earn Regular Income from These Real Estate ETFs
3 Best Monthly Dividend REITs for 2017