If earning an income without lifting a finger is your primary investing goal, you may have noticed that Rithm Capital(NYSE: RITM) has been offering a 9.5% dividend yield at recent prices.
Stocks usually don't offer yields this high unless investors are worried about their underlying businesses. Interest rates that rose rapidly in 2022 caused many of Rithm Capital's peers to lower their payouts, but this real estate investment trust (REIT) hasn't adjusted its dividend since raising it in late 2021.
Is a dividend cut around the corner, or can this highly diversified asset manager maintain its eye-popping yield for everyday investors who buy at recent prices? Here's a look at how the REIT is managing its quarterly dividend commitment.
Not your typical mortgage REIT
Rithm Capital is often classified as a mortgage REIT, but it's a lot different from AGNC Investment, which earns a living in the margins between its short-term borrowing expenses and the interest it receives from the mortgage-backed securities (MBS) in its portfolio.
Rithm Capital generates investment income from its MBS portfolio, but this is a small portion of its overall business. In addition to the usual mREIT operation, Rithm runs a single-family rental business that owns 4,266 units spread throughout the country.
When Rithm's rental business wants to construct a new build-to-rent community, it can turn to its own lending platform. In the first half of 2024, the company originated loans totaling $1.7 billion. That's a lot of activity for a company that estimated the total value of its portfolio at between $6.2 billion and $7.9 billion at the end of June.
About Rithm Capital's mortgage servicing business
When lenders don't want to be responsible for collecting monthly payments on the mortgages they originate, they sell rights to service those mortgages to companies like Rithm Capital. At the end of June, Rithm had full rights to service mortgages that still owed $587 billion.
Rights to service a mortgage end up worthless if the borrower prepays by refinancing or other means. At the end of June, interest rates were still too high for refinancing to make sense on 96% of the loans in Rithm Capital's full mortgage servicing rights (MSR) portfolio.
Rithm's MSR portfolio is responsible for about 35% of total revenue. While MSRs have been a reliable revenue stream over the past couple of years, a refinancing tsunami brought on by declining interest rates could quickly change this currently successful operating segment into a liability.
More than just mortgages
To diversify away from the cyclical mortgage industry, Rithm acquired Sculptor in late 2023. At the time, the alternative asset manager had assets totaling $34 billion under management.
The Sculptor portfolio continues to reduce reliance on mortgage servicing. In the second quarter, it completed a pair of collateralized loan obligations (CLOs) that further diversified the portfolio away from the cyclical mortgage industry.
Buy, sell, or hold?
Rithm Capital stock looks like a terrific bargain right now. Its book value at the end of June was $6.1 billion, but its market cap at recent prices is just $10.48 per share.
Rithm Capital earned $0.44 per share in the second quarter and $1.19 per share over the past 12 months. This is considerably more than it needs to meet a quarterly dividend obligation currently set at $0.25 per share.
A deep recession could lead to a dividend cut, but there doesn't appear to be one on the horizon. Inflation has subsided enough to warrant a recent interest rate reduction, but unemployment is still relatively low. Buying more shares or adding to the ones you have looks like a great way to pump up your passive income stream.
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Cory Renauer 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.
