Is This 9%-plus Dividend Yield Safe?


Real opportunities to secure a 9% dividend yield don’t come along all that often. High payouts like these often prove unsustainable and end up getting slashed.

One stock, however, has supported an eye-popping dividend for over a decade. Investors have received this massive dividend many times before, with the yield sometimes exceeding 10%. If you’re interested in high-income dividend stocks, it’s time to learn about Rithm Capital (RITM 0.89%).

Rithm Capital stock is built for income

With a market cap of only $5 billion, Rithm Capital is still mostly unknown to investors, though it has gained a following of dedicated investors since it went public in 2013. The business model is simple: Rithm Capital invests in a diverse range of mortgage instruments like residential loans and commercial real estate, all of which generate free cash flow that is then paid out to investors. This business is commonly referred to as a mortgage real estate investment trust (mREIT).

Over time, this business model has produced exceptional returns, though the share price hides this reality. In 2013, Rithm stock traded at $13 per share. Today, the stock is priced around $10 per share — a loss of nearly 25% over a decade-long holding period.

What isn’t included in these returns, however, is the dividend. Including those payouts, investors have generated total returns of more than 150% since the IPO. That’s quite a difference, highlighting how Rithm Capital is, at the end of the day, a bet on its dividend.

RITM data by YCharts

Should you buy this dividend stock?

While Rithm Capital has expanded its portfolio in recent years, acquiring exposure to related asset classes like consumer loans and residential properties, the core of its business is still mortgage origination and servicing. What does that mean? Mortgage origination helps put mortgage loans together, with the originator taking a small slice of the mortgage value as a fee. Mortgage servicing, meanwhile, includes all of the administrative tasks associated with managing a mortgage loan, a debt that often needs to be serviced for several decades.

In 2023, more than half of Rithm Capital’s shareholder equity was tied up in mortgage servicing alone. It is this segment that will drive the dividend’s sustainability.

On Feb. 7, Rithm Capital released its fourth-quarter results. Servicing fees grew to $482 million from $442 million the quarter before, a strong indication that the company’s core business continues to grow, though a batch of one-time charges related to a change in the fair value of some assets put a dent in the final numbers. Servicing fees are likely to grow again in future quarters, driven by a recent acquisition that will add around $85 billion in assets to its servicing portfolio.

Make no mistake: Rithm Capital is highly dependent on the health of the U.S. mortgage market. If mortgage volumes dip, as they did during the early days of the pandemic, Rithm stock will likely follow suit. There’s one aspect to this stock, however, that insulates investors from some of that pain. Right now, shares trade at a 28% discount to book value. Keep in mind that for most of its history, the stock traded at a premium to book value.

Betting on this dividend is not without risk, but the discount to book value shoulders some of that load. The market, it seems, is already pricing in a softening of the mortgage market. Management is taking advantage of that negative sentiment by launching a $300 million share repurchase plan. Around $200 million of that will be dedicated to buying back common stock, with the other $100 million destined for preferred share repurchases.

These factors in combination make Rithm stock a great candidate for both income and value investors alike. Many analysts now believe the Federal Reserve could cut interest rates in 2024, making mortgages more affordable, a likely boon to Rithm Capital’s business. With a 9%-plus dividend, the current discount to book value, plus a sizable new stock buyback program, shares offer multiple ways to win.

Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.



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