This REIT’s 10.1% Dividend Yield Really Is Safe
January 3, 2018
Lock in This 10.1% Dividend Yield
You have to work hard to find a good dividend yield nowadays.
Most bonds pay next to nothing, and anything with a decent payout tends to be risky.
But today’s stock should inspire confidence. Apollo Commercial Real Est. Finance Inc (NYSE: ARI) is a mortgage real estate investment trust (REIT) which lends money to new developments. And with a 10.1% yield, income hunters have taken note.
At least as far as we care about the distribution, this payout looks reasonably safe.
Apollo has paid dividends since 2010. Over that period, management has never cut the distribution.
For the full year, the company expects to earn $261.0 million in net investment income (NII). Further, management has pledged to mail out $168.0 million in distributions. This comes out to a payout ratio of 64%.
In general, I like to see companies pay out less than 75% of their earnings as dividends. This ensures some wiggle room, just in case the business has a bad year or two. So, in the case of Apollo, owners can sleep easy.
This distribution will likely grow, too.
Apollo has benefited from low defaults. Management has also expanded operations, growing loan volumes year after year.
This has created a bulging income stream. In 2018, analysts project NII to increase another 20% to $314.0 million. Over the next five years, the street expects earnings to grow at around a mid-teen clip.
Most of those profits should get passed on to owners. Since 2010, management has increased the distribution on three occasions. Investors can expect future bumps to come in more or less in line with profits.
The Apollo story does come with one blemish: yields.
Mortgage REITs borrow money short-term and lend it out long-term. Their profit comes from the difference between these two interest rates, called the “spread.”
Today, these spreads look tight. The difference between short- and long-term interest rates has narrowed over the past year. This has clipped mortgage REIT profits, putting the entire sector in Wall Street’s dog house.
That said, spreads move in cycles. The difference between short- and long-term yields should widen over time, though exactly when is hard to say. This could boost Apollo’s NII and result in even faster distribution growth for owners.
But even if that bullish thesis doesn’t play out, Apollo’s 10.1% dividend yield looks safe.
