By Greg Jensen
Much of the resilience in the market comes down to one thing.
Money, and especially institutional money, needs a yield. These last few weeks have seen disappointing earnings from some big name Dow components, more evidence of an anemic recovery….. and record highs in the stock market. The Fed is still merrily pumping money into the system, though, and this looks more likely to continue with each piece of disappointing news. This leaves financial institutions awash with cash and looking at negative real yields in the bond market. That cash has to go somewhere and high quality stocks with decent dividends have been the beneficiaries.
None of this is news to anyone who follows the market, but it does present a problem for investors. The prospect of slow growth combined with demand for dividend paying stocks has left many of them beginning to look expensive. When companies such as Proctor & Gamble (PG) and AT&T (T) are trading at P/Es of 18 and 17 respectively it is hard to get up any enthusiasm.
If you are looking for yield, then mortgage REITs, companies that invest in mortgage backed securities, could be more attractive. Of course, yield never comes without risk, and the leveraged nature of these instruments makes them pretty volatile. As long as the Fed keeps QE in place, however, the downside would seem somewhat limited as interest rates aren’t likely to jump significantly in the immediate future. The worst of the housing bust would seem to be over and most people eligible to refinance already have, so the future for holders of mortgage backed securities (MBS) looks less scary than in the recent past. Consider these three to give the overall yield of your portfolio a boost.
Anworth Mortgage Asset Corporation (ANH)
ANH released Q1 2013 earnings a couple of days ago that were in line with most expectations. The stock is currently trading at a forward P/E of around 9.2 and offers a 9.6% yield.
American Capital Agency (AGNC)
AGNC offers a yield of 15.2% with a P/E around 7.9. It should be said that the yield on mortgage REITs is subject to change each quarter, as they operate as pass through entities, handing 90% of profits back to shareholders. At a P/E this low the market is anticipating a lower dividend from AGNC, so don’t be surprised if that should be the case. A 33% cut in the payout, however, would still give you a yield around 10%.
Annaly Capital Management (NLY)
NLY is yielding 11.5% with a P/E of 9.26.
Options offer many opportunities to create yield with covered call and other strategies, but dividend payments are an important component of the more static parts of your portfolio as well. Mortgage REITS expose you to interest rate risk as well as regular market and company risk, so don’t overexpose yourself to the sector. They do, however, provide a boost to the overall yield in your portfolio at a time when there is a need to be a little more creative in the search for income.