Updated on April 1st, 2025 by Nathan Parsh
Investors are likely familiar with the standard real estate investment trusts, or REITs. Most REITs own physical real estate, lease the properties to tenants, and derive rental income, which is used to pay dividends.
However, investors may not be as familiar with a different set of REITs: mortgage REITs. These REITs do not own physical properties but rather buy mortgage securities.
Mortgage REITs typically have much higher dividend yields than standard REITs, but this does not necessarily make them better investments.
For example, Orchid Island Capital (ORC) is a mortgage REIT with an extremely high dividend yield of more than 19%. Orchid Island pays dividends each month, which makes it a compelling combination of a high yield and monthly dividend payments.
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Orchid Island has an exceptionally high dividend yield and is one of the highest-yielding stocks that we cover.
However, the outlook for mortgage REITs is challenged, and Orchid Island’s dividend yield may still not be sustainable even after multiple dividend cuts in the past several years.
This article will discuss why income investors should not be lured by Orchid Island’s extremely high dividend yield.
Business Overview
Whereas traditional REITs own a portfolio of properties, mortgage REITs are purely financial entities. Orchid Island is an externally managed specialty finance REIT That invests in residential mortgage-backed securities, either pass-through or structured agency RMBSs.
An RMBS is a debt instrument that collects cash flows, based on residential loans such as mortgages, home-equity loans, and subprime mortgages. Mortgage-backed securities are an investment product representing a basket of pooled loans.
As investors saw first-hand during the 2008 financial crisis, mortgage-backed securities can be highly volatile and risky. That said, mortgage REITs were among the biggest winners as interest rates fell during the Great Recession’s aftermath.
Growth Prospects
Mortgage REITs make money by borrowing at short-term rates, lending at long-term rates, and pocketing the difference, or the spread between the two.
When the spread between short-term rates and long-term rates compresses, profitability erodes. This is why mortgage REITs can be dangerous if short-term interest rates are about to increase.
Source: Investor Presentation
Orchid Island has not been able to produce meaningful growth in the past several years. The trust has experienced extreme earnings volatility over the past several years, with a net loss in several years in the past decade and multiple years in which the trust barely generated a profit.
Orchid Island’s inability to perform well with interest rates at zero makes it unlikely that the trust can regain its footing in the current higher interest rate environment.
On January 30th, 2025, the company reported a net income of $0.07 per share for Q4 2024. In 2024, the company faced $236 million in net interest expenses and $16.7 million in total expenses, or $0.26 per share.
However, Orchid’s net realized and unrealized gains on RMBS and derivative instruments last year were $49.1 million, or $0.75 per share.
The book value per share declined to $1.01, or 11%, to $8.09, and the total return was 4.73%. The company paid dividends of $1.44 per share in 2024, contributing to the decrease in book value during the quarter.
Despite these challenges, Orchid maintained strong liquidity, holding $353.6 million in cash and unpledged securities, equivalent to 53% of stockholders’ equity. Additionally, the company’s borrowing capacity was well above outstanding repurchase agreements spread across 25 lenders.
Management, led by CEO Robert Cauley, emphasized its commitment to providing stable dividends to shareholders while closely monitoring the interest rate environment and prepayment speeds to adjust its portfolio strategy accordingly.
Looking forward, Orchid continues to focus on managing interest rate risk and maintaining a diversified RMBS portfolio. As of the end of 2024, its portfolio was valued at approximately $4.2 billion. The company aims to optimize its asset selection and hedging strategies to navigate the evolving economic landscape and deliver attractive risk-adjusted returns to shareholders.
Dividend Analysis
Orchid Island’s eroding fundamentals have caused a significant drop in its dividend payments to shareholders in the past several years.
Orchid Island currently pays a monthly dividend of $0.12 per share, but this is still below the split-adjusted monthly dividend it paid before 2021.
Source: Investor Presentation
Looking back further, Orchid Island’s monthly dividend payout has been reduced multiple times since then.
The trust’s current dividend payout is $1.44 per share on an annualized basis. Based on its recent closing price, the stock offers a 19.3% dividend yield. This is a huge dividend yield, considering the average dividend yield of the S&P 500 Index is currently 1.3%.
However, there are too many red flags for Orchid Island to be considered an attractive investment, including the trust’s multiple dividend cuts over the past few years and inconsistent profitability in that time. With an expected payout ratio of 178% for 2025, the risk for further dividend cuts is high.
In addition, Orchid Island has issued shares rapidly in recent years. Its share count has skyrocketed since 2013, but this comes at a steep cost to shareholders in the form of heavy dilution.
With a volatile dividend history, Orchid Island is not an appealing choice for investors looking for steady dividend payouts from year to year.
Orchid Island stock appears to be the definition of a yield trap. The stock has badly lagged behind the S&P 500 Index, and we believe this underperformance will continue.
Final Thoughts
Sky-high dividend yields can be deceiving. Orchid Island’s 19.3% dividend yield is enticing, but this stock has all the makings of a yield trap.
The trust has a sizable amount of debt on the balance sheet and is issuing shares at an alarming pace. The outlook for mortgage REITs has deteriorated as the Federal Reserve continues to hold interest rates high. The trust’s most recent Q4 results show a significant decline in net interest income and per-share book value.
Orchid Island cut its dividend several times in the past few years due to poor fundamental performance. Investors should tread very carefully with mortgage REITs like Orchid Island. As a result, income investors would be better served by buying higher-quality dividend stocks with more sustainable payouts.
Don’t miss the resources below for more monthly dividend stock investing research.
And see the resources below for more compelling investment ideas for dividend growth stocks and/or high-yield investment securities.
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