Is Armour Residential REIT’s High Dividend Yield Worth the Risk of a 7 Percent Loss?

It’s tempting to buy the dip in some of the battered REITs (Real Estate Investment Trusts) and high-yield dividend stocks, while most others flee them due to Trump’s tariff concerns. Undoubtedly, catching a falling knife of a stock (or a REIT) is not for those who are easily rattled by extreme volatility. But when it comes to securities that pay out generous dividends or distributions, the rapidly swelling yield is an added incentive to jump into the deep end and brave the pain. After all, as the share price falls, the yield tends to rise. And if a firm’s cash flows aren’t pressured enough to warrant a distribution or dividend cut, investors may be able to walk away with super-charged yield in hand.

Of course, income investors seeking to give themselves a big raise by pursuing higher-yielders on the way down should evaluate the distribution health and the sustainability of cash flows in the event of an economic recession, one that may be unavoidable as Trump moves ahead with his tariffs on most of the world.

Indeed, not all REITs will fold and slash their distributions when times get a bit harder. The REITs with more durable cash flows can keep their distributions going strong, even when enduring tougher sailing. The key is telling the difference between the REITs with sustainable payouts and the ones that will have few other options than to trim the payout.

Understand the risks before reaching for yield.

As always, it’s essential to understand the full extent of the risks when buying securities after a big drop.

One must ask oneself whether such a drop accurately reflects the potential for fundamental decay in light of the developments that sparked the sell-off. Oftentimes, a security may be sold off for all the wrong reasons. If not much has changed about the long-term fundamentals or the state of cash flows, a fallen REIT can prove a fantastic buying opportunity. However, if the cash flows are put on the ropes, a distribution may not make it through a downturn in one piece.

In any case, it’s always wise to put in just a bit more homework when going for such securities for a shot at deeper value and fatter yields. Chasing yield without a full understanding of the business can lead to reduced distribution and mounting losses. With that warning out of the way, let’s focus on a specific REIT that one Reddit user, who posted in the r/dividends subreddit, is considering buying more of after its recent stumble.

Armour Residential REIT: A battered REIT with a sky-high yield.

Enter shares of Armour Residential REIT (NYSE:ARR), a 20.2%-yielder that tanked 24% in the past three months. With shares now down close to 90% from their all-time highs, there’s an intriguing deep-value proposition for investors seeking bang for the buck. The $1.14 billion mid-cap REIT invests in various residential mortgage-backed securities (MBS) and is required to pay at least 90% of its taxable income back to shareholders.

Upon first glance, the yield, which weighs in at a whopping 20.2%, looks too good to be true, at least in my humble opinion. As you’d imagine, there’s quite a bit of risk with the name amid mounting macro headwinds. That said, the cash flow situation isn’t as bad as one would imagine, with the dividend accounting for close to 90% of cash flows. Indeed, there are multiple scenarios where the payout could persist.

However, in my view, there isn’t much room for error. And with a history of dividend reductions (a reduction to 24 cents per share from 40 cents back in late 2023), let’s just say I wouldn’t be shocked in the slightest if another reduction were to unfold in the face of a Trump tariff-induced economic shock.

The Reddit user is an apparent fan of the yield, but is sitting on a position that’s down around 7%. Given their post is a few weeks old, their position — had they held onto it — is likely down closer to 20%. Personally, I think it’s too late to sell out of a relatively small position, especially if the Reddit user rode down the latest dip. In any case, I’m in no rush to buy shares at around $14 and change, even though the potential rewards could be great if the ultra-high-yielder manages to turn a corner.

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