Unless you hold your MIC shares in a registered plan, be prepared for a large tax bite, writes Gordon Pape.
I recently received an e-mail from a reader who wanted some advice about mortgage investment corporations (MICs). He wrote: “I have some holdings of both Firm Capital Investment Corp. and Atrium Mortgage Investment Corp. Both provide high dividend payouts in the 7-per-cent to 8-per-cent range. How safe are these investments?”
Firm Capital FC-T has been a recommendation of my Income Investor newsletter since January, 2004. It’s been in business since 1988.
It’s a small non-bank lender, based in Toronto, that describes itself as “A Boutique Real Estate Capital Bank.” It offers short-term residential and commercial real estate mortgage loans and real-estate-related debt investments. As of Sept. 30, the company’s investment portfolio was $627.1-million.
The company pays monthly “dividends” of 7.8 cents (93.6 cents a year), plus year-end top-ups. The top-up for 2025 was 8.4 cents a share and was paid with the monthly dividend on Jan. 15. The regular monthly payment hasn’t changed since 2007.
The company is conservatively managed and went through the great financial crisis of 2007 to 2009 without a dividend cut.
Driven by falling rates, my High-Yield Portfolio continues to soar, averaging a 10% gain annually
Atrium Mortgage Investment Corp. AI-T was founded in 2001 and went public in 2012. It provides commercial and residential loans in major urban centres in Ontario and western Canada. Its mortgage portfolio is comprised of loans ranging from $300,000 to $30-million, and the loans are secured by real estate in major Canadian urban centres. As of Sept. 30, the portfolio value was $917.3-million, of which 96 per cent were first mortgages.
Like Firm Capital, Atrium makes monthly payments of 7.8 cents a share.
MICs are an excellent source of above-average cash flow. At a current price of $11.69, Atrium yields 8 per cent. Firm Capital yields 7.7 per cent, not including the top-up, at a price of $12.19. But there are some facts to consider before you invest.
Safety: Our reader’s specific question was about the safety of these investments. I would rate them as low-medium on the risk scale. Both companies came through the financial crisis unscathed. However, the massive debt buildup we’ve seen in recent years has raised concerns about heightened default risk. These are small companies with modest portfolios compared to the big banks. The fact that their yields are about double those of the banks tells you what the market thinks of their safety. It’s an old investing axiom: The higher the gain, the greater the risk.
Dividends: MICs describe their monthly payments as “dividends.” That sounds good, but the Canada Revenue Agency doesn’t treat them that way. MIC payments are taxed as if they were pure interest. The dividend tax credit does not apply. So, unless you hold the shares in a registered plan, be prepared for a large tax bite.
Share price: If you look back at the history of MIC share prices, you’ll see big swings. For example, you could have bought shares in Firm Capital as low as $7.73 in March, 2020, at the start of the COVID-19 pandemic. By June, 2021, they were trading at over $15 – almost double the price. Those were unusual times, but the price of these stocks generally moves with the interest rate cycle. In 2022, Firm’s share price plummeted from around $14 in January to below $11 in late December, during the period when the Bank of Canada was raising rates. That was a great time to take a position – at those low prices, Firm yielded 8.8 per cent.
The bottom line is that MICs can enhance cash flow, but they should be bought strategically when prices are at the low end of their range. Hold them in a registered plan to escape the punitive taxes.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.
Editor’s note: A previous version of this article incorrectly stated that Atrium MIC has not paid year-end top-ups in recent years. That reference has been removed.