Two Harbors Investment (NYSE: TWO) is a 14-year-old New York-based mortgage real estate investment trust (REIT). It invests in residential mortgages.

The stock has a giant 17% dividend yield, which is quite attractive to income investors. But can investors rely on the yield staying that large going forward?

When we analyze mortgage REITs, we use a metric called net interest income (NII). Mortgage REITs borrow money and then lend it out at a higher interest rate. NII is the difference between how much the company earns in interest (minus expenses) and how much it pays in interest.

Unfortunately for Two Harbors, its NII has been evaporating.

Since 2019, the company’s NII has plummeted 86%. And this year’s NII is forecast to drop another 63% from last year’s total.

This will be a big problem when it comes to paying the company’s dividend.

Last year, Two Harbors paid shareholders more than $290 million in dividends – that’s nearly eight times more cash than it brought in.

To say that’s unsustainable would be like saying San Francisco is a bit untidy these days – a dramatic understatement.

Though the dividend has been cut recently, Two Harbors is still projected to pay out $232 million in dividends this year, despite the fact that NII is expected to come in at less than $14 million.

Unsurprisingly, as NII has fallen, so has the company’s dividend.

Two Harbors has cut its dividend five times over the past 10 years.

Considering the company’s dismal record of maintaining its dividend and its putrid NII performance, not only is the dividend unsafe, but another dividend reduction is a sure thing.

Dividend Safety Rating: F

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