Starwood Property Trust (NYSE: STWD) is a mortgage real estate investment trust, or REIT, that has been publicly traded for 15 years. Its $26 billion portfolio consists of loans to both commercial and residential borrowers.
The company has paid a $0.48 per share quarterly dividend since 2014, which comes out to a 10% yield on the stock’s current price. Can shareholders expect to continue receiving $0.48 per share each quarter?
Starwood Property Trust uses a metric it calls “distributable earnings” to measure its cash flow.
In 2023, distributable earnings fell nearly 9% from $726 million to $663 million. When Starwood releases its full-year results in February, distributable earnings are expected to be $677 million.
Because 2023’s $663 million was below the prior year’s figure, the stock’s dividend safety rating gets a one-point penalty. If 2024’s total comes in at less than $663 million, that downgrade will remain in effect.
In 2023, Starwood paid $601 million in dividends for a 91% payout ratio. The total dividend payout is forecast to inch up to $610 million in 2024, but with distributable earnings also projected to rise, the payout ratio would actually drop to 90%.
With mortgage REITs, I’m comfortable with payout ratios of 100% or lower, as REITs must pay out 90% of their earnings. (Distributable earnings aren’t the same as regular earnings, as distributable earnings factor out noncash items.) Since REITs have that higher requirement and typically aim to provide the most income possible to investors, a 100% payout ratio is reasonable.
If it goes above 100%, it’s a problem. But up to 100% is fine as long as distributable earnings – or whatever cash flow metric the company uses – aren’t expected to fall.
So we have a company that has paid a stable dividend for 10 years and has a payout ratio within my comfort zone. The only yellow flag is the decline in distributable earnings in 2023. If the growth number is positive in 2024, all is forgiven, and the company’s dividend safety rating will be perfect.
Until then, we can’t ignore the one-year decline in distributable earnings, because it increases the risk of a dividend cut just a little. But at the moment, I’m not worried.
Dividend Safety Rating: B
Safety Net Did It Again
In 2023, none of the nine stocks rated “A” in this column cut their dividend. Neither did any of the eight rated “B” or the eight rated “C.” But once we got to the stocks with “D” and “F” grades, things changed. Two of the nine “D”-rated stocks cut their dividends, and six of the nine “F”-rated stocks lowered their payouts.
The numbers were similar in 2024.
Of the 10 stocks rated “A,” none cut their dividends, while three raised them.
“B”-rated stocks were also able to maintain their payouts, with zero cuts and six raises out of 14 stocks.
We rated 11 stocks “C” last year. Two raised their dividends, and two cut them, including longtime Dividend Aristocrat 3M (NYSE: MMM), which had raised its dividend 66 years in a row.
We also saw two raises and two cuts among the five “D”-rated stocks.
Lastly, as expected, out of nine “F”-rated stocks, there were no dividend increases and three dividend cuts.
Below, you can see the average change in the dividend for each grade, measured from the time we evaluated each stock to the end of 2024.
The data shows that stocks rated “A” and “B” for dividend safety are unlikely to lower their dividends, while “D”-rated and especially “F”-rated stocks have a strong possibility of a dividend cut.
Keep requesting stocks you’d like us to analyze in Safety Net by entering the ticker symbol in the comments section. Remember, we can only analyze individual stocks, not ETFs or other types of funds. Cash flow is a vital metric in the Safety Net formula, and ETFs and other funds don’t produce cash flow.