HomeBusinessBeware: These 5 REITs Can Be Returns Traps

Beware: These 5 REITs Can Be Returns Traps

A yield trap is a stock that currently pays a very attractive dividend yield, but will likely have to cut its dividend soon.

Novice investors often make the mistake of simply choosing stocks based on high dividend yields, but these are often yield traps with a high risk of a dividend cut. When dividends are cut, the investor gets the double whammy of a price drop and a smaller dividend.

Investors can reduce the risk of buying a yield trap by focusing on two key factors: the relationship between earnings and dividends paid (the payout ratio) and the company’s history of cutting, suspending or increasing its dividend. If the dividend paid out exceeds the income generated, a dividend cut becomes likely.

Take a look at six real estate investment trusts (REITs) that are at high risk of becoming a yield trap based on one or both of the key factors mentioned.

Global Net Lease Inc. (NYSE:GNL) is a New York-based net-lease diversified REIT founded in 2011. Its portfolio of more than 1,296 properties spans 66.8 million square feet across 11 countries. It has a rental rate of 96% with a weighted average remaining lease term of 6.8 years. Properties in the US and Canada account for 80% of Global Net Lease’s portfolio, with a further 20% located in Europe.

Global Net Lease pays a quarterly dividend of $0.35 and its annualized dividend of $1.40 currently yields 19%. But the dividend was cut from $0.53 to $0.40 per share in April 2020 and again to $0.35 per share in October 2023. With term funds from operations (FFO) of just $1.09, the 130% payout ratio is too high to be sustainable. FFO has also fallen in five of the last six quarters, so the falling fundamentals are a big warning sign for investors.

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Orchid Island Capital Inc. (NYSE:ORC) is a Vero Beach, Florida-based specialty financial mortgage REIT that acquires, invests in and provides financing for U.S. residential mortgage-backed securities.

Orchid pays a monthly dividend of $0.12 per share and its annualized dividend of $1.44 now yields 16.64%. But the dividend has been cut five times in the last five years.

In addition, Orchid has delivered five consecutive quarters of negative earnings per share (EPS) and four consecutive quarters of negative revenue. So Orchid pays $1.44 in annual dividends while earning a negative $0.25 per share. Those numbers won’t work for long.

Orchid is at extremely high risk of having to cut dividends again, and investors should not be tempted by the high dividend rate.

Ares Commercial Real Estate Corp. (NYSE:ACRE) is a New York City-based mortgage REIT that originates and invests in commercial real estate loans and other investments in the US. Ares was founded in 2011.

Ares Commercial pays a quarterly dividend of $0.25 per share, but the dividend was cut from $0.35 to $0.33 in September and cut again to $0.25 per share in February.

The $1 annualized dividend yields 13.27%, but don’t expect this yield to remain that high in the future if future earnings per share are only $0.17 per share.

Dynex Capital Inc. (NYSE:DX) is a Glen Allen, Virginia-based mortgage REIT that invests in mortgage-backed securities (MBS) through leverage. It has a fair portfolio value of $7.4 billion. Dynex was founded in 1987.

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Dynex Capital pays a monthly dividend of $0.13 per share. To its credit, the dividend has been stable since June 2020. However, the dividend was cut in August 2019 and May 2020. And the annualized dividend of $1.56 per share does not cover the future earnings per share of negative $0.12 per share. Dynex has had four consecutive quarters of negative earnings per share and revenue.

The 12.27% dividend yield is enticing, but this REIT is a potential yield trap and best avoided.

Generation Income Properties Inc. (NASDAQ:GIPR) is a Tampa, Florida-based diversified REIT that owns 26 single-tenant properties, including retail, office and industrial rental properties in densely populated areas. Seventy-two percent of renters have investment grade credit or equivalent. Generation Income is still a small company that was founded in 2015 and went public in 2021.

Generation Income pays a monthly dividend of $0.039, and its annual dividend of $0.468 currently yields 12.58%. The dividend was reduced from $0.54 per share to $0.39 per share in October 2022.

In addition to the dividend cut, this is another REIT with four consecutive quarters of negative FFO. The annualized dividend rate of $0.47 is unsustainable with a future FFO of negative $0.22.

While each of the previous REITs could pay a nice dividend in the future, the potential for further dividend cuts and/or share price declines is too obvious to ignore. Investors should consider looking for better options even if the dividend yields are smaller.

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Discover opportunities beyond REITs

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This article Beware: These 5 REITs Could Be Returns Traps originally appeared on Benzinga.com

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