Rithm Capital (NYSE: RITM) is a mortgage REIT that sports a generous 10% yield. Will that dividend eventually turn into a sour note, or can it continue to make sweet, sweet music for investors?
Rithm Capital invests in a variety of loans, including residential mortgages, commercial loans, and consumer loans.
The measure of cash flow that we use for mortgage REITs and other lenders is net interest income. It’s safe to say Rithm’s net interest income has not been in rhythm. It’s been all over the place.
Net interest income plummeted to $115 million in 2024 from $255 million the year prior. It popped back to $212 million last year. This year, it is forecast to drop to $163 million, and it is projected to slip further in 2027 to $151 million.
Safety Net has a big issue with falling cash flow. To feel secure about the dividend, we need to see cash flow be flat or rising. Each time it falls, Safety Net lowers the safety rating of the dividend. Declining cash flow is considered a cardinal sin.
As if that inconsistency isn’t bad enough, the company pays out multiple times its net interest income in dividends.
Last year, Rithm paid shareholders $643 million in dividends, or 304% of its net interest income.
This year, with net interest income expected to drop 23%, the payout ratio is projected to climb to 405%, or four times the amount of net interest income that Wall Street anticipates.
That is not sustainable.
When Rithm began paying a dividend in 2013, it started on the right foot. It raised the payout every year until 2018, when it kept the dividend at $0.50.
But in 2020, as the pandemic hit, Rithm slashed the dividend 90% to just $0.05 (though it raised it by $0.05 in each of the next three quarters).
In 2021, management raised the dividend for the last time to $0.25, where it has stayed ever since. Eight years later, the dividend remains half of what it was in 2018.
A 10% yield often comes with higher risk. When blue chip companies are offering 3%, you have to question why a company’s yield would be as high as 10%.
With no consistent growth in net interest income, a payout ratio that is way too high, and a big dividend cut in the recent past, we’re forced to conclude that Rithm Capital’s dividend is not safe.
Dividend Safety Rating: F
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