A 13.5% monthly dividend and one big catch
A double-digit dividend yield paid every month sounds like an income investor's dream come true. The company in question offers exactly that: a dividend of around 13.5% per year, split into twelve monthly payments that arrive with clockwork regularity. For many people looking for passive income, it's immediately tempting. But with yields this high, if something seems too good to be true, you have to ask where the catch is.
Key points
It pays a dividend of around 13.5% annually, and each month, maintaining the same monthly amount for 75 consecutive months.
It doesn't buy regular loans, but mortgage-backed securities with a government guarantee, so it bears virtually no risk of borrowers defaulting.
However, it pays for this safety with massive leverage: for every dollar of equity, it has roughly 7 dollars borrowed.
In one quarter it earns 6.7%, in another it loses, depending on how interest rates move. Book value fluctuates up and down.
Operating margin is 236%. With this type of company, though, you need to look somewhere else entirely.
And there is a catch, though maybe not where you'd expect it. The company carries almost no risk of losing money due to defaults because it buys securities with a government guarantee. That sounds safe, and in one respect it is. But the risk lies elsewhere: the company uses enormous financial leverage, and its value swings up and down with interest rate movements. So in one quarter it can earn investors a nice return, and in another, take some of their money away, without the company having done anything wrong.
That's exactly why this stock is one of the most misunderstood in the entire market. Investors drawn in by the high yield alone, who don't understand how the company works, are often surprised later when they find that although they're receiving a generous dividend, the value of their shares is shrinking. Conversely, those who understand the model and track the right numbers can find a useful tool in it. The difference between these two camps isn't how high the dividend is, but whether the investor understands what they're getting it for.
So the question for an investor isn't whether the yield is high. That's obvious. It's whether it's a yield you can enjoy in peace, or one that's merely compensation for a risk you must monitor carefully.