Two Harbors Investment: Dividend Sustainability In Question

Two Harbors Investment Corp (TWO) is a real estate investment trust that focuses on investing in, financing, and managing residential mortgage-backed securities, mortgage servicing rights, and other financial assets. The company has a history of paying dividends to its shareholders, with the most recent dividend of $0.45 per share paid on April 29, 2024. While the company has maintained consistent dividend payments since 2009, there are concerns about the long-term sustainability of its dividend payments due to negative dividend growth rates and low profitability and growth ranks. The company's 12-month trailing dividend yield of 14.79% and a 12-month forward dividend yield of 13.61% suggest a potential decrease in dividend payments over the next 12 months.

Two Harbors Investment Corp's dividend yield and growth

Two Harbors Investment Corp (TWO) is a real estate investment trust that focuses on investing in, financing, and managing residential mortgage-backed securities, mortgage servicing rights, and other financial assets. The company has a history of consistent dividend payments since 2009, with dividends distributed on a quarterly basis.

As of April 2024, the company announced a dividend of $0.45 per share, payable on April 29, 2024, with an ex-dividend date of April 3, 2024. This has attracted the spotlight on the company's dividend history, yield, and growth rates.

Breaking down TWO's dividend yield and growth, as of 2024, the company has a 12-month trailing dividend yield of 14.79% and a 12-month forward dividend yield of 13.61%. This indicates a projected decrease in dividend payments over the next 12 months. The annual dividend growth rates over the past 3 and 5 years were -9.10% and -26.00%, respectively, with a 10-year rate of -16.60%.

TWO's dividend yield and growth rates suggest that while the company has been consistent with its dividend payments, there is an expectation of decreasing dividends in the near future. The negative growth rates over the past several years further support this projection. However, investors should carefully consider these factors alongside the company's growth prospects and financial performance to make informed decisions.

Dividend payout ratio

The dividend payout ratio is the total amount of dividends paid to shareholders as a proportion of a company's net income. It is sometimes referred to simply as the payout ratio. The formula for calculating the dividend payout ratio is:

> Dividend Payout Ratio = Dividends Paid / Net Income

Alternatively, it can be calculated as:

> Dividend Payout Ratio = 1 - Retention Ratio

The retention ratio is the percentage of net income kept by the company for growth, also known as retained earnings.

The dividend payout ratio is a key financial metric used by investors to determine the sustainability of a company's dividend payments. It also helps investors identify what type of returns a company is likely to offer—for example, whether the company is more likely to offer dividend income or capital gains.

Younger, high-growth companies tend to reinvest profits in their business and have lower dividend payout ratios. More mature companies, on the other hand, tend to have higher dividend payout ratios as they do not need to commit as much of their earnings to business expansion.

In the case of Two Harbors Investment Corp, the company's dividend payout ratio as of 2023-12-31 was 0.00. This means that the company is retaining all of its earnings and not paying any dividends to shareholders. This is despite Two Harbors Investment Corp maintaining a consistent dividend payment record since 2009 and distributing dividends on a quarterly basis. The company's 12-month trailing dividend yield of 14.79% and its 12-month forward dividend yield of 13.61% suggest that dividend payments are expected to decrease over the next 12 months.

Profitability and growth ranks

Two Harbors Investment Corp's profitability rank is 3 out of 10 as of 2023-12-31, suggesting the company's dividend may not be sustainable. The company has reported net profits in 7 out of the past 10 years.

To ensure the sustainability of dividends, a company must have robust growth metrics. Two Harbors Investment Corp's growth rank of 3 out of 10 suggests that the company has poor growth prospects and thus, the dividend may not be sustainable.

The company's 3-year EPS growth rate showcases its ability to grow its earnings, a critical component for sustaining dividends in the long run. During the past three years, Two Harbors Investment Corp's earnings increased by approximately 65.70% per year on average, a rate that outperforms approximately 89.06% of global competitors.

While Two Harbors Investment Corp's high dividend yield may attract income-focused investors, the negative dividend growth rates and low profitability and growth ranks raise concerns about the long-term sustainability of its dividend payments. The company's robust 3-year EPS growth rate provides a glimmer of hope, suggesting potential for future earnings and dividend stability.

Tax treatment of dividends

Dividends are shares of a company's profits that are distributed to shareholders. In the US, the tax treatment of dividends depends on whether the Internal Revenue Code (IRC) classifies them as qualified dividends or ordinary dividends (also called nonqualified dividends).

Qualified Dividends

Qualified dividends are taxed at the same rates as the capital gains tax rate, which is lower than the ordinary income tax rates. The tax schedule for qualified dividends features only three levels: 0%, 15%, and 20%.

To be considered a qualified dividend for tax purposes, two main criteria must be met:

• The dividend is paid by a US corporation domiciled in a US state or territory or a foreign corporation listed on a major US stock exchange.
• The investor must own the stock for more than 60 days within a specific 121-day holding period.

Ordinary Dividends

Ordinary dividends (typically those paid out from most common or preferred stocks) are taxed at the same rates as standard federal income tax rates. For the 2023 and 2024 tax years, the tax rates for ordinary dividends are 10% to 37%.

Double Taxation

Dividends are taxed twice, a concept known as double taxation. The first round of taxes occurs on the earnings of a company, and the second round of taxes is paid by the shareholders who receive the dividends.

Minimising Dividend Tax

One way to minimise taxes on dividends is to ensure they are qualified dividends, which incur a lower tax rate than nonqualified dividends. Another method is to open a tax-advantaged brokerage account, such as an IRA, where you can defer taxes until you are in a lower income tax bracket.

Dividend history

Two Harbors Investment Corp (TWO) has a consistent dividend payment record since its founding in 2009. Dividends are currently paid out quarterly, with the most recent dividend of $0.45 per share paid on April 29, 2024. The previous dividend of the same value was paid out three months prior.

TWO's 12-month trailing dividend yield is 14.79%, while its 12-month forward dividend yield is 13.61%, indicating a potential decrease in dividend payments over the next 12 months. Over the past three years, the company's annual dividend growth rate was -9.10%, extending to -26.00% over a five-year period. TWO's dividend payout ratio as of December 31, 2023, is 0.00.

TWO's dividend yield and growth rate have raised concerns about the long-term sustainability of its dividend payments. However, the company's robust 3-year EPS growth rate of 65.70% outperforms 89.06% of global competitors and may provide stability to future dividend payments.

Frequently asked questions