While we wait for our more speculative favorites to cycle back in favor, we remain focused on opportunities to lock in 9% to 11% yields that effectively do the work of the S&P 500 in a normal year, suggests Todd Shaver, editor of Bull Market Report.
Our favorite income idea is a little off most investors’ radar — Rithm Capital 7% Fixed Rate Reset Cumulative Preferred D (RITM-PRED). Our longtime readers know Rithm Capital (RITM) better by its old name, New Residential Investment Corp. — which took management of its massive portfolio of mortgage servicing rights away from Fortress Investment Group in June and decided a fresh corporate brand was required.
These securities are a kind of derivative that separates the actual home loan obligation from the associated administration fees. Suffice to say that they’re worth money and generate income. In RITM’s case, the rights on $544 billion in housing debt translate into about $9 billion on the balance sheet and about $1.6 billion a year in revenue.
As long as those mortgages aren’t refinanced or paid off early, that’s a pretty good annuity for management to pass back to shareholders, and a wave of refinancings is not exactly a threat in this economic environment. Add in interest income and a few other factors and there’s easily $3.5 billion coming into this company every year, of which $0.25 to $0.30 is reliably available for dividends.
What we like about the Preferred D shares is that the dividend was fixed at 7% at par value and now amounts to more like 9.5% for investors who lock it in now. If interest rates drop and make that dividend onerous, you can bet RITM will buy the shares back when its callback comes around in 2026. The liquidation price is set at $25, implying a 32% capital gain here at $18.42.
Remember, 2026 is now only three years away, which makes 32% a pretty good reward for three years of patiently generating 9.5% annualized income in the meantime. Sooner or later, management will liquidate these shares and their fixed dividend. It will happen, which makes RITM Preferred D as good a bet on the future as it gets.
