Starwood Property Trust‘s (NYSE: STWD) 13.5% yield is one of the highest yields among mortgage real estate investment trusts, or mREITs as they are known.
These companies make money by borrowing funds short term at low interest rates and lending them out longer term at higher interest rates.
The difference between what an mREIT borrows and what it makes from lending (minus expenses) is called net interest income. That’s the metric we look at when evaluating an mREIT’s dividend.
Starwood Property Trust has been in business for 29 years and boasts a $17 billion portfolio.
This year, Wall Street forecasts a giant 81% jump in net interest income to $528 million from $292 million in 2019.
That is certainly good news.
What is not such good news is the fact that even with the spike in net interest income, Starwood Property Trust cannot afford its dividend.
This year, Starwood is forecast to pay $546 million in dividends, eclipsing the $528 million in net interest income. That’s certainly better than last year, when it paid $538 million – which was nearly double the company’s net interest income.
You can see from the chart that Starwood Property Trust pays shareholders more than it makes.
That is not sustainable…
The company has never cut its dividend since it began paying one in 2010, and it has maintained the $0.48 per share quarterly payout since 2014. That is somewhat impressive, especially considering Starwood hasn’t been able to actually afford that dividend in years.
Will the next 12 months be the time that Starwood Property Trust finally has to face the music and cut its dividend?
Hard to say. Management has clearly stated it will do whatever it can to continue to pay shareholders, but the numbers simply don’t work. It will have to continue to raise or borrow money, like it often does, to sustain the dividend.
So while the company’s commitment to the dividend is admirable, the dividend has to be considered at-risk.
Dividend Safety Rating: D
About Marc Lichtenfeld
Marc Lichtenfeld is the Chief Income Strategist of Investment U’s publisher, The Oxford Club. He has more than three decades of experience in the market and a dedicated following of more than 500,000 investors.
After getting his start on the trading desk at Carlin Equities, he moved over to Avalon Research Group as a senior analyst. Over the years, Marc’s commentary has appeared in The Wall Street Journal, Barron’s and U.S. News & World Report, among other outlets. Prior to joining The Oxford Club, he was a senior columnist at Jim Cramer’s TheStreet. Today, he is a sought-after media guest who has appeared on CNBC, Fox Business and Yahoo Finance.
Marc shares his financial advice via The Oxford Club’s free daily e-letter called Wealthy Retirement and a monthly, income-focused newsletter called The Oxford Income Letter. He also runs four subscription-based trading services: Technical Pattern Profits, Penny Options Trader, Oxford Bond Advantage and Predictive Profits.
His first book, Get Rich with Dividends: A Proven System for Earning Double-Digit Returns, achieved bestseller status shortly after its release in 2012, and the second edition was named the 2018 Book of the Year by the Institute for Financial Literacy. It has been published in four languages. In early 2018, Marc released his second book, You Don’t Have to Drive an Uber in Retirement: How to Maintain Your Lifestyle without Getting a Job or Cutting Corners, which hit No. 1 on Amazon’s bestseller list. It was named the 2019 Book of the Year by the Institute for Financial Literacy.
