Image Source: Pexels
 

Most of the companies that have stocks trading under $10 face significant business headwinds, which exert pressure on the stock prices. Therefore, investors should pay great attention to the fundamentals of these stocks before purchasing them. On the other hand, some of these stocks may have been punished to the extreme due to negative market sentiment and hence they may be offering great investing opportunities. In this article, we will discuss the prospects of three high-dividend stocks that are trading under $10 and are attractively valued right now, namely Brandywine Realty Trust (BDN), Chimera Investment Corporation (CIM), and Ares Commercial Real Estate (ACRE).
 

Brandywine Realty Trust

Brandywine Realty Trust is a REIT that owns, develops, and leases an urban town center and transit-oriented portfolio that includes 163 properties in Philadelphia, Austin, and Washington, D.C. The trust generates 74% of its operating income in Philadelphia, 22% of its operating income in Austin, and the remaining 4% in Washington, D.C.

As Brandywine generates a vast portion of its operating income in Philadelphia and Austin, it greatly benefits from the advantages of these two areas. According to official reports, Philadelphia has had the highest growth rate of highly educated citizens since 2008 while Austin is the fastest-growing metropolitan area, the best place to start a business and it has retrieved all the jobs lost due to the coronavirus crisis.

The stock of Brandywine has slumped 66% over the last 12 months, to a 10-year low, mostly due to the impact of high inflation on the results of the REIT and its valuation. Due to the surge of inflation, the Fed has been raising interest rates at an unprecedented rate since early last year in order to cool the economy and thus restore inflation to its target level. High-interest rates significantly increase the interest expense of Brandywine and thus take their toll on its funds from operations. During the last 12 months, interest expense has consumed 94% of the operating income of Brandywine. Moreover, high inflation has compressed the valuation of the stock, as it has greatly reduced the present value of future cash flows.

Due to the impact of inflation on Brandywine, the stock is now trading at an extremely low price-to-FFO ratio of 2.7, which is a 10-year low for the stock. Brandywine is also offering an all-time high dividend yield of 18.8%, with a payout ratio of 66%. Thanks to its aggressive stance, the Fed is likely to restore inflation to its target level in the next few years. When that happens, Brandywine is likely to revert toward its 10-year average price-to-FFO ratio of 10.7. Therefore, the stock will have great upside potential whenever inflation subsides. Moreover, even if Brandywine cuts its dividend by 50%, it will still be offering an above-average yield. Thanks to its reasonable payout ratio of 66%, the REIT is not likely to cut its dividend by more than 50%.
 

Chimera Investment Corporation

Chimera Investment Corporation is a specialty finance company that operates as a REIT. Through its subsidiaries, the company invests in a diversified portfolio of mortgage assets, such as residential mortgage loans, non-agency residential mortgage assets, and other real estate-related securities.

Chimera borrows funds based on short-term interest rates and invests in mortgage assets whose yield follows the path of long-term interest rates. As a result, the REIT is extremely sensitive to the yield curve, i.e., the difference between long-term and short-term interest rates.

Chimera has been severely hurt by the aggressive interest rate raises implemented by the Fed since early last year. Due to the efforts of the Fed to cool the economy, short-term interest rates have risen above long-term interest rates, signaling that the market expects a recession to show up in the near future.

The surge of short-term interest rates above long-term interest rates is exerting great pressure on the results of Chimera. Due to this headwind, the company saw its earnings per share plunge 39% last year. Even worse, its earnings per share are likely to decline further this year.

On the bright side, the stock of Chimera has become exceptionally cheaply valued after its 48% decline in the last 12 months. Chimera is currently trading at a nearly 10-year low price-to-earnings ratio of 6.2 and is offering a decade-high dividend yield of 16.8%. Given the extreme payout ratio of 102% and the vulnerability of Chimera to the prevailing investing environment, its dividend is far from safe. Nevertheless, even after a dividend cut, the stock will still be offering an above-average yield. Thanks to its cheap valuation, the stock is attractive from a long-term point of view, especially given that the worse seems to be behind the REIT as interest rates are likely to peak in the next few months.
 

Ares Commercial Real Estate

Ares Commercial Real Estate is a specialty finance company that is focused on originating and investing in commercial real estate loans and related investments. The company is externally managed by a subsidiary of the publicly traded Ares Management Corporation, a leading global alternative asset manager. Externally managed companies have a higher inherent risk than internally managed companies, as the interests of management are not always aligned with the interests of shareholders.

The loan portfolio of Ares Commercial Real Estate, which is almost fully composed of senior loans, comprises 60 market loans across 8 asset types, with an outstanding principal balance of $2.3 billion. Approximately 70% of the loans are tied to multifamily, office, and industrial properties.

The stock of Ares Commercial Real Estate has plunged 45% over the last 12 months and thus the stock is currently offering a nearly 10-year high dividend yield of 15.2%. However, there are good reasons behind the abnormally high yield. The company is highly vulnerable to the current investing environment of rising interest rates. It has also proved vulnerable to recessions. Given also its volatile business performance and its excessive payout ratio of 91%, its dividend is far from safe.

On the other hand, Ares Commercial Real Estate appears cheaply valued right now. The stock is trading at a decade-low price-to-earnings ratio of 6.2. Moreover, even if the company slashes its dividend, it will probably still be offering an above-average dividend yield. Overall, in the absence of a severe recession, the stock seems cheap right now, though it is somewhat riskier than Brandywine and Chimera.
 

Final Thoughts

When a stock offers an abnormally high dividend yield, it usually signals that a dividend cut may be just around the corner. This rule certainly applies to the above three stocks. Nevertheless, these stocks appear exceptionally cheaply valued right now and hence they are likely to highly reward patient investors off their current depressed prices whenever inflation subsides and the economy recovers.

More By This Author:

Top 3 ‘Hold Forever’ Monthly Dividend Stocks
High Dividend 50: 3M Company
10 Best Performing Blue Chip Stocks