Here's How Redwood Trust Can Afford Its 8% Dividend Yield
The past 18 months have been miserable for companies in the mortgage business. Mortgage originators have seen origination volumes collapse as the Federal Reserve began its policy of raising interest rates to defeat inflation. Mortgage real estate investment trusts (REITs) have seen their assets decline in value. Most mortgage REITs were forced to cut their dividends. Redwood Trust (NYSE: RWT) also cut its dividend. Is the new dividend sustainable?
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Mortgage REITs are different than the typical REIT that focuses on property management. The typical REIT develops commercial real estate and then rents out the property to a tenant. It is the classic, easy-to-understand landlord/tenant business model. Mortgage REITs don't invest in property for the most part; they invest in property debt, which generally means mortgages. Instead of collecting rent, they earn interest. In many ways, a mortgage REIT looks more like a bank or hedge fund than a typical REIT.
Source Fool.com
