Five years ago, I gave Orchid Island Capital (NYSE: ORC) an “F” rating for dividend safety. Two months later, the company cut its monthly dividend from $0.40 per share to $0.064 (adjusted for a 1-for-5 reverse stock split).
Then, in September 2021, Orchid earned itself another “F” rating in an analysis by my colleague Kristin Orman, our Research Director here at The Oxford Club. Sure enough, the company lowered its dividend four more times over the next three years.
The stock currently pays a $0.12 monthly dividend, which equates to a yield of 18%.
Can Orchid shake off the stink of its previous “F” ratings, or is another cut coming?
Orchid Island Capital is a Vero Beach, Florida-based mortgage real estate investment trust (REIT) with a portfolio worth nearly $4 billion. To determine its ability to pay its dividend, we’ll look at net interest income, or NII – the difference between how much the company earns from lending cash and the cost of borrowing the funds.
Not only has Orchid Island’s net interest income taken a nose dive… it turned negative last year. Though the company’s fundamentals are improving, net interest income is expected to be negative again this year.
That’s a big problem right off the bat. The company did not generate cash last year and is forecast to lose money again in 2024.
If that were the only strike against its dividend safety, I’d still be very concerned. It’s hard to pay the bills – and especially hard to reward shareholders – when you have no money coming in the door.
Then, of course, there’s also Orchid Island’s history of dividend cuts: 10 cuts in 10 years. If you knew nothing about the company other than its dividend-paying track record, you’d likely assume cut #11 is coming within the next year. Add on the fact that the company is hemorrhaging cash, and it is a near-certainty that it will slash its 18% yield.
Of all the “F”-rated stocks I’ve analyzed in this column over the years, I don’t believe I’ve ever seen such a sure thing. This dividend will be lower a year from now – probably much sooner.
Dividend Safety Rating: F
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