If passive income is your primary goal, you may find Rithm Capital's (NYSE: RITM) 9.2% dividend yield alluring. The real estate investment trust (REIT) is reasonably priced, but management is overhauling the business, which could affect its future dividend payout. That has some shareholders wondering if now is the time to sell. Which direction is right for you?
Whether you own the stock, hold Rithm Capital stock, or are considering buying it today, here are some things you'll want to consider first.
Rithm Capital is undergoing a transformation
Rithm Capital is a global asset manager that invests in real estate, credit, and financial services. Founded in 2011, it is one of the largest non-bank mortgage originators and servicers in the United States. Early in its history, it focused on investments in mortgage servicing rights (MSRs). It operated as New Residential Investment Corp. until June 2022, when it rebranded to Rithm Capital.
It has transformed over recent years, expanding into other alternative investments. For example, in July 2023, it purchased $1.4 billion in consumer loans from Goldman Sachs. Then, in November 2023, it completed an acquisition of Sculptor Capital Management for $630 million. The acquisition boosts Rithm's assets by giving it nearly $33 billion in assets under management (AUM) across credit, real estate, and multiple other investing platforms.
Image source: Getty Images.
Reasons to buy
Rithm is undergoing significant changes to its business model. The company has grown beyond mortgages and into alternative assets, which have exploded in popularity. Management sees alternative asset management as a way to create more value for shareholders and sees itself becoming more like Blackstone or Ares Management.
The alternative asset space has boomed as wealthy investors and institutions seek assets outside of traditional finance to boost returns. According to the investment data company Preqin, global alternative assets under management (AUM) are expected to reach $24 trillion by 2028, representing an 8.4% annual growth rate.
In addition, it recently announced a $300 million share repurchase plan to buy back shares, which trade at a slight discount to book value.
RITM Price to Book Value data by YCharts
Reason to sell
If you want passive income for your portfolio and find Rithm Capital's high dividend yield appealing, you may not want to own the stock anymore. Currently, Rithm operates as a REIT for tax purposes. As a REIT, it enjoys a pass-through tax structure which means it doesn't pay taxes at a corporate level. To qualify as a REIT, the company must follow certain rules, including:
- Paying out at least 90% of its taxable income to shareholders
- Investing 75% of its total assets in real estate assets or cash
- Getting at least 75% of its gross income from real estate-related sources
This tax structure is why REITs can appeal to income investors. However, Rithm's push into alternative asset management could mean big changes regarding its structure.
During the company's fourth-quarter earnings call, CEO Michael Nierenberg said, "To become, I think, a world-class asset manager, we need to continue to simplify our story." This may mean changing its corporate structure. If that's the case, it could be bad news for investors drawn to the stock for its passive income potential.
Reason to hold
If you've held Rithm Capital since its New Residential Investment days, you've seen the company slowly transform its investment approach and portfolio. Management sees this as a way to unlock more value for shareholders, and it may be right.
Alternative assets are expected to grow, which could be a strong tailwind for Rithm's business. Its dividend payout could decrease as it continues its push into the space. However, if you're OK with a lower payout down the road and think its alternative asset push unlocks more value, hold on to the stock.
Is Rithm Capital for you?
Investing is a personal approach that depends heavily on your objectives and goals. If your goal is to generate passive income through dividends, then the stock probably isn't suitable for your portfolio. However, if you're looking to cash in on the growth in alternative investments, Rithm Capital could be an excellent way to do so at a reasonable valuation.
Should you invest $1,000 in Rithm Capital right now?
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Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Blackstone and Goldman Sachs Group. The Motley Fool has a disclosure policy.
