Two Harbors Series C Preferred: A Dividend Boost for Income Investors in a Rising Rate Environment

The recent dividend rate hike for Two Harbors Investment Corp's Series C preferred stock (TICKER: TWO.PRC) marks a significant milestone for income-focused investors. With the annual dividend climbing over 3% to $2.39 per share, this floating-rate security is positioning itself as a compelling income generator amid shifting interest rates. Let's dissect the implications for investors.

The Dividend Increase: A Closer Look

On March 20, 2025, Two Harbors announced a notable adjustment to the dividend rate for its Series C preferred stock, raising the annual payout from $1.81 to $2.39—a jump of $0.58, or 32%. This increase was driven by the floating-rate mechanism tied to the Three-Month CME Term SOFR (Secured Overnight Financing Rate), which has risen steadily in . The first quarter dividend of $0.5983 (paid April 28) and the second quarter's $0.6037 (paid July 28) reflect this upward trajectory.

Floating Rates: A Double-Edged Sword

The Series C preferred's floating-rate structure is both its strength and its vulnerability. The dividend is calculated as SOFR + 0.26161% + 5.011%, meaning it adjusts quarterly based on market conditions. While this exposes investors to rate volatility, it also ensures the dividend grows when rates rise—a critical advantage in today's environment. For instance, if SOFR continues to climb, investors could see further hikes in coming quarters.

However, this structure also means dividends could decline if SOFR falls. Income investors must weigh this risk against the security's current yield, which at $2.39 annually represents a ~6.3% yield at recent prices.

The Company's Strategy: Stability Amid Challenges

Two Harbors' confidence in its Series C dividend stems from its core business: mortgage servicing rights (MSR) and mortgage-backed securities (MBS). These assets have historically performed well in low-interest-rate environments but face headwinds as rates rise. The company has mitigated this by diversifying its portfolio and maintaining a conservative leverage ratio.

While the firm cited a “litigation-related contingency accrual” in its Q1 report—a red flag for some investors—it emphasized that this did not jeopardize its ability to pay dividends. The accrual, tied to ongoing legal disputes, underscores the need for caution, but the dividend hike suggests management believes its core business remains intact.

Risks to Consider

• Litigation: The unresolved legal issues could drain resources or force unexpected capital allocations.
• Rate Cycles: A prolonged period of declining SOFR would reduce dividend payouts.
• Prepayment Risk: Rising rates could accelerate prepayments on MBS, reducing income.

How Does TWO.PRC Compare to Peers?

Compared to fixed-rate preferred stocks, TWO.PRC's floating rate offers a hedge against inflation and rising rates. For example, a typical fixed-rate preferred yielding 5.5% today would lose value if rates rise further, whereas TWO.PRC's dividend could increase. However, its yield lags behind some high-yield fixed-rate issues, so investors must decide whether the rate flexibility justifies a lower current payout.

Investment Takeaways

• For Income Seekers: TWO.PRC's 6.3% yield and floating-rate structure make it a strong contender in a rising-rate world. The dividend hike shows the mechanism works as intended.
• Risk Management: Pair this with fixed-rate preferreds or bonds to balance rate sensitivity.
• Hold for the Long Term: Litigation risks are manageable but warrant monitoring. Avoid if you prioritize absolute yield stability.

Final Verdict

Two Harbors' Series C preferred stock is a nuanced but rewarding play for income investors willing to navigate its risks. With dividend growth already materializing and a structure aligned for a higher-rate future, TWO.PRC deserves a spot in diversified portfolios—especially as the Federal Reserve's next moves remain uncertain.

Investors should consult their financial advisor before making decisions based on this analysis.