JamesBrey
Buying stocks that pay out high yields can greatly accelerate your retirement timeline and/or enhance your retirement lifestyle. While many like to pursue the dividend growth investing path to financial independence, this approach generally takes a long time, as illustrated by the following chart that was recently published by my friend and colleague Austin Rogers:
| Starting Dividend Yield | Dividend Growth Rate | 10-Year YoC |
| 3% | 9% | 7.1% |
| 3.25% | 8% | 7.0% |
| 3.5% | 7.25% | 7.0% |
| 3.75% | 6.5% | 7.0% |
| 4% | 5.75% | 7.0% |
| 4.5% | 4.5% | 7.0% |
| 5% | 3.5% | 7.1% |
| 5.5% | 2.5% | 7.0% |
| 6% | 1.5% | 7.0% |
As a result, if you can find quality high yield stocks, it may well end up being a much more efficient path to building a passive income stream that covers your living expenses and funds your retirement years.
That said, if you choose to go the high yield route, it is extremely important to insist on balance sheet strength, cash flow stability, and strong dividend coverage in order to ensure that the dividend is sustainable. Otherwise, you can easily end up buying yield traps which end up slashing their dividends and destroying a lot of shareholder value.
In this article we will discuss a stock that we believe is well-positioned to deliver a high yield that can be depended on for many years to come: New York Community Bancorp (NYSE:NYCB).
NYCB Stock Business Model
NYCB is a banking company that holds the recently combined entities New York Community Bank and Flagstar Bank.
The companies merged because their offering complement each other nicely with no geographic overlap. NYCB has a strong presence in the New York City metroplex as well as in Florida, parts of Ohio, and Arizona. Meanwhile, Flagstar has a strong presence across the upper Midwest as well as a presence in California.
As a result, the combination of the two is expected to accelerate growth for both businesses with a greater branch and ATM network, expanded resources, product offerings, and deepened industry knowledge. The merger also improves the company’s funding profile and mitigates some of its interest rate risk exposure while also improving its economies of scale and other expected synergies.
NYCB Stock Dividend Safety
In a recent exclusive interview with NYCB, we asked about how safe the dividend would be during a severe downturn in the economy, including in the housing market. The company told us they think their business will weather it well and that their dividend should be fine as well for several reasons.
First of all, NYCB’s business model is quite low risk with very strong underwriting performance. During Q3, nonperforming assets declining by $6 million sequentially and stand at a mere 0.08% of total assets. The company also recorded zero net charge-offs during the quarter.
Second, Flagstar’s business model on residential lending is an originate and sell model. For example, in 2020-2021, they originated tens of millions in residential mortgages and sold all of them into the secondary market, typically to Fannie Mae or Freddie Mac. As a result, they make their money off the origination of loans and don’t have a significant amount – if any – of residential loans on their balance sheet. They have some in the held for sale category, and those are just waiting to be sold. So they don’t really hold any residential mortgages on their balance sheet. Therefore, from a credit perspective, they should be insulated from a decline in housing prices.
Third, NYCB is the largest portfolio lender to multifamily housing in New York City. Its niche is specifically in the non-luxury rent-regulated apartments, which they have been doing for five decades. As a result, their business model has weathered recessions and all sorts of business cycles over that span while suffering no losses in that portfolio. The biggest safety hedge for that aspect of NYCB’s business is that under the rent control laws, the price of the rent per apartment is fixed so it doesn’t fluctuate like a market rent and therefore these apartments generally suffer significantly lower impact from disruptions than market rents experience.
The weighted average loan to value for its entire multifamily portfolio is about 60%, so there would have to be a significant decline in commercial real estate prices in order for the value of the loans to be impacted. Last, but not least, the owners of the buildings that it lends to are generational owners. Most of these buildings have been managed by their families for decades. So, these are not people that are just going to walk away from their properties, especially if they have roughly 40% equity invested.
Fourth, NYCB runs an extremely efficient business with an efficiency ratio of 38.75% compared to its peer group’s efficiency ratio of 48.39%.
On top of all that, NYCB’s adjusted earnings per share are easily covering its dividend. In Q3 alone, the company generated $0.31 in adjusted earnings per share against a dividend of just $0.17 per share. Meanwhile, the Flagstar acquisition is expected to be accretive to earnings per share, only making the dividend safer. Management also reiterated its commitment to the dividend moving forward, stating on the earnings call:
we’ve had a long history here of a very strong dividend and is very focused capital management process. We are very comfortable with asset quality. We’re very comfortable with how we look at our capital deployment. And going forward, we feel very strongly that we’ll continue to pay a very strong dividend. And obviously, this has been a history and culture of the company going back for decades. So we’re very confident. The company had record earnings going into this — in the beginning of the first half of this year. We’re seeing some margin pressure based on substantial movements on Fed action. However, over time, this company will navigate through it and we’ll have strong asset quality and foster on a stand-alone basis, a very focused expense management philosophy to generate good returns to our shareholders and a very strong dividend. So that’s always been our culture. On a projected combined basis, we just earn more.
NYCB Stock Risk Analysis
While there is always the risk that interest rate volatility and/or an epic economic downturn could significantly hurt the company, NYCB believes it is in good shape to handle interest rate volatility post-merger. On a standalone basis, NYCB is liability sensitive, but post merger with Flagstar, NYCB is now slightly net asset sensitive given Flagstar’s large adjustable rate retail loan portfolio. As a result, the company should do well regardless of whether or not interest rates are falling or rising.
NYCB Stock Valuation
With a dividend yield of ~7%, a 8.85x price to earnings ratio relative to its five-year average of 11.28x, and a very conservative 54.8% payout ratio, NYCB looks like a very attractively priced and safe high yield stock.
Investor Takeaway
Finding safe income in the high yield space is tricky. However, when you find it, it can serve as a great accelerant towards a rich and early retirement. With stocks like NYCB, retirees should be able to sleep well at night knowing that their lucrative income streams should be safe for years to come alongside solid long-term growth potential.
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