Want $5,000 in passive income? Invest $74,000 In These High Yielding Dividend Stocks
Inflation is heating up. January’s consumer price index came in at 7.5%, the highest level since 1982. Geopolitical conflict will also put pressure on the cost of energy, which could keep inflation going at a high level in the near future.
If we are going through a prolonged period of higher inflation, it would be prudent to give dividend stocks a place in your portfolio. According to a study by Fidelity, dividends have accounted for 40% of total stock market returns since 1930. And during periods of inflation, dividends accounted for an even larger share of market returns. During the inflationary decades of the 1940s and 1970s, dividends accounted for 65% and 71% of total S&P 500 returns, respectively.
Two high yielding dividend stocks you can add today are Arbor Real Estate (ABR 0.45% ) and New York Community Bank ( NYCB -2.58% ).
1. Arbor Realty: 7.78% dividend yield
Arbor Realty Trust is a real estate investment trust (REIT) that provides loans, focusing on multifamily housing. REITs combine real estate investments with equity investments, making real estate investing accessible to a greater number of investors.
REITs are exempt from income tax provided that they pay out 90% of their taxable income to shareholders each year in the form of dividends. Because of this tax structure, REITs can offer attractive dividend yields. However, REITs are treated as non-qualified dividends — meaning investors have to pay taxes on them — so they’re best held in tax-efficient Individual Retirement Accounts (IRAs).
Arbor Realty focuses on multifamily housing because it tends to remain more stable through a variety of market cycles. This is because housing is essential and will always be in demand.
Arbor Realty primarily provides bridging loans to buyers of multi-family properties with short-term financing. In 2021, $10.8 billion of its loans — 89% of its total loan and investment portfolio — were bridge loans on multifamily properties. These loans are granted to borrowers who buy a property and quickly improve its value, often through renovation. These borrowers can then use the proceeds from a conventional mortgage to repay the bridge loan.
For Arbor Realty, these loans have a weighted average maturity of 24 months. This short duration could benefit Arbor Realty as interest rates begin to rise. This is because it does not lock in low interest rates for an extended period and the company will be able to take advantage of it when rates eventually rise.
Over the past five years, Arbor Realty has experienced tremendous growth. Its structured portfolio grew by 47% compounded annually. During that time, his net interest income grew by 36%, compounded annually. Arbor Realty earns around 8%, so investing $37,000 in the multi-family REIT could earn you $2,960 in passive income per year.
2. New York Community Bancorp: 5.85% dividend yield
New York Community Bancorp is a regional bank with approximately 237 branches. Like Arbor Realty, New York Community Bank specializes in multi-family loans in New York, particularly non-luxury residential properties. Multifamily loans account for $25.8 billion of its total loans, or about 82%.
The bank is currently transforming under the leadership of its Managing Director Thomas Cangemi. Part of this transformation is focusing on lower cost and stickier deposits, as well as a diversified loan mix. Deposits grew by 8% last year as the bank rolled out its deposit strategy.
Part of this strategy includes expanding its banking-as-a-service (BaaS) initiative. BaaS is a global movement that allows non-banks to integrate their financial products into a bank’s systems. BaaS offers banks an excellent opportunity to increase their deposits at a lower cost while integrating the bank’s services with fintech.
According to researchers at Oliver Wyman, a subsidiary of Marsh and McLennan, the cost of acquiring a new customer can range from $100 to $200. However, with BaaS technology, this cost ranges from $5 to $35. For New York Community Bank, BaaS deposits amount to $1 billion, but still represent a small portion of its total deposits of $35.1 billion.
The bank sees the New York residential market rebounding as the pandemic subsides, with strong demand outstripping supply. That led to record loan growth in the fourth quarter, which propelled strong annual gains for the bank last year. Loans rose 7% year-on-year as the bank posted its highest diluted earnings per share (EPS) since 2005.
The bank has been paying a high dividend for a decade now, with an average 10-year yield of 6.14%. It also has a payout ratio of 44%, which suggests the bank should have no problem maintaining that dividend. With a current yield of 5.85%, investors investing $37,000 would recoup $2,165 in annual income.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.