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A pair of unknown stocks with attractive dividends? Be surprised.

Claude Malouxe
27. 4. 2023
6 min read

Most of the time, when the term dividend stock is mentioned, investors think of large conglomerates. But few people look even among companies that are not so big anymore. So let's take a look today at companies that, while not large, offer an attractive dividend yield.

Over time, dividends have proven to be a crucial component of stock investment returns. According to historical statistics, dividends have contributed to 30-90% of the total returns of the S&P 500 index. In this article, we look at two companies that offer attractive dividend yields of at least 12%

Seven Hills Realty Trust $SEVN-1.0%

SEVN
$12.44 -$0.13 -1.03%

Seven Hills Realty Trust $SEVN-1.0% is a REIT focused on middle market and transitional commercial real estate. The company is primarily engaged in commercial real estate mortgage loan investments. The company's portfolio currently contains loan commitments of approximately $727 million. The Company has approximately $772 million of loan commitments with a weighted maximum maturity of approximately 3 years.

The company has a history of reliable dividend payments since 2012, making it an attractive vehicle for investors seeking regular and stable income.

SEVN currently pays a quarterly dividend of 35 cents per share, representing a 14% yield. This is a very competitive yield compared to other companies operating in the real estate investment trust industry.

This stock is currently pleasing analyst Chris Muller, who is quite bullish on this company.

Our new model reflects our March 2023 interest rate forecast, which assumes one-month LIBOR YE23/YE24 rates of 4.55%/3.50%. We have modeled that the quarterly dividend will remain at the newly increased level of $0.35 per share through 2024... SEVN shares now trade at just 0.55x December 31 GAAP BV of $18.46 and we believe the current discount to book value is unwarranted given earnings growth. assets, headwinds from rising interest rates and the potential for further meaningful dividend growth.

Analyst Chris Muller rates SEVN stock as Outperform (Buy) with a price target of $12.50, indicating potential for further upside in the company's stock.

Rithm Capital $RITM+1.0%

RITM
$11.02 $0.11 +1.01%

Rithm Capital (RITM) is an internally managed REIT with investments in mortgage loans and mortgage servicing rights (MSRs). RITM's total assets are approximately $32 billion, making it a major player in this market segment. 44% of the portfolio is mortgage servicing and the other 29% is MSR-related investments. An additional 8% of the portfolio consists of mortgage loans receivable and 5% is listed as origination or original mortgage loans. The remainder of the portfolio consists of securities and real estate and residential mortgage loans.

RITM declared a dividend of 25 cents per share, a 12.6% yield. This is another example of a company offering an attractive dividend yield for investors looking for regular income.

Analyst Eric Hagen also provided commentary on the outlook for this company during his research on the company.

We like the stock here in part because we see that dividend stability is mostly a function of slow prepayments in the MSR portfolio and less contingent on the initial segment returning to profitability in the near term. We expect MSR valuations to still find some support from higher short-term interest rates, although we think growing expectations that the Fed will cut rates later this year could limit some upside potential for servicing valuations. Roughly half of the company's capital is in the MSR portfolio, but with the leverage it has there, we estimate that it approaches 60-75% of core earnings.

Analyst Eric Hagen rates RITM stock a BUY with a $13 price target, indicating potential upside for the company's shares. The analyst consensus rates RITM stock as a strong buy, indicating optimism in the market's expectations for the company's future.

Pros and cons of investing in SEVN and RITM

Investing in SEVN and RITM shares brings several advantages, but also some disadvantages. The main advantages include:

Attractive dividend yields: both REITs offer dividend yields of at least 12%, which is significantly above average compared to the overall market. This makes them an attractive choice for investors looking for stable and regular income.

Portfolio diversification: investing in SEVN and RITM allows investors to diversify their portfolio through exposure to the commercial real estate and mortgage lending sectors. In this way, investors can reduce the overall risk of their investments.

Positive Analyst Ratings: Both SEVN and RITM are rated Buy by analysts, indicating that these companies have the potential for further growth.

However, investing in SEVN and RITM also comes with some drawbacks:

The risk of declining market value of real estate: since SEVN focuses on middle market and transitional commercial real estate, it may be affected by a decline in market value of real estate in the event of an economic slowdown or changes in the industry.

Regulatory Risk: RITM is exposed to the risk of changes in regulation regarding mortgage lending and mortgage servicing rights, which could impact its earnings and dividend policy.

Interest Rate Sensitivity: As both REITs invest in real estate and mortgage loans, their returns may be sensitive to changes in interest rates. Rising interest rates could increase funding costs and thereby reduce returns and dividends.

Conclusion

Seven Hills Realty Trust (SEVN) and Rithm Capital (RITM) may present attractive investment opportunities for investors seeking regular dividend income. Both REITs offer high dividend yields, positive analyst ratings, and the opportunity for portfolio diversification.

However, it is also important for investors to consider the potential drawbacks and risks associated with investing in these companies. This includes the risk of a decline in the market value of real estate, potential changes in regulation and interest rate sensitivity. Investors should carefully consider their individual investment objectives and risk tolerance before investing in SEVN or RITM.

Choosing the right investments is the key to success in the financial markets. Although dividends are an important source of income, it should be remembered that high dividend yields are not the only factor that should be considered when investing. A careful analysis of a company's financial ratios and fundamentals is also important, as is a perception of the market environment and sector trends.

WARNING: I am not a financial advisor, and this material does not serve as a financial or investment recommendation. The content of this material is purely informational.

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