A 15% Yielder That Keeps Getting Snipped

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Orchids have a reputation of being tough to grow. Orchid Island Capital‘s (NYSE: ORC) dividend has also had growth problems.

Chief Income Strategist Marc Lichtenfeld last reviewed the company’s dividend in November 2019. Back then, he cautioned investors to “beware this island of misfit dividends.”

He was right.

Just four months later, Orchid Island Capital slashed its monthly dividend by more than 31%, from $0.08 per share to $0.055 per share.

Today, the monthly dividend has grown to $0.065 per share. Orchid Island Capital’s dividend yield is a hefty 15%-plus. This time, will the company’s dividend growth have staying power?

Let’s take another look at the company’s financials…

Orchid Island Capital is a mortgage real estate investment trust (REIT) based in Vero Beach, Florida. That’s just an hour-and-a-half drive north of where Marc and I live. Unlike “regular” REITs that own buildings, mortgage REITs own paper mortgages.

Mortgage REITs make money borrowing at lower, short-term rates and lending it out at higher, long-term rates. The difference, or net interest income (NII), is a mortgage REIT’s cash flow.

Orchid Island Capital earned $91 million in NII in 2020. That was up 55% from the $58.7 million booked in 2019. But that was down 12.75% from the $104.3 million the company collected in 2017.

After its dividend cut last year, the mortgage REIT paid out $53.6 million in dividends. Its payout ratio was around 59% – well below SafetyNet Pro‘s 100% cutoff for mortgage REITs.

This year, Orchid Island Capital’s dividend obligation will be higher since its monthly dividend and share count have risen since 2020. With growing NII, the company should be able to cover it.

However, Orchid Island Capital’s dividend has a bad reputation for a reason. As singer Freedy Johnston said, “It isn’t just talk, talk, talk.”

Management has cut the dividend multiple times since June 2015.

If NII declines, management won’t hesitate to whack the dividend again.

Orchid Island Capital’s dividend isn’t safe.

Dividend Safety Rating: F

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