If a richyield is your goal, then fewinvestments can compete
withmortgage real estate investment trusts (REITs).
Thesestocks currently pay exceptional 9-19%dividend yields. In a
world where U.S.Treasuries yield just 2%, these REITs trulyoffer
extraordinary performance. Mortgage REITs can afford to pay
outsized dividends because they must distribute the majority of
their income to investors and utilizeleverage -- borrowingmoney at
low rates andinvesting in high-yielding mortgage securities -- to
amplify shareholder returns.
Despite generous dividends, prices for mortgage REITs took a
beating in the second half of 2012, after the Federal Reserve
launched a $40-billion monthly purchasing program for agency-backed
mortgage securities. As a result, demand for mortgage securities
rose, yields fell and the spreads mortgage REITs earn from their
investments declined. Major players such as
American Capital Agency (NYSE
Annaly Capital (NYSE
experienced price declines of 20% or more.
The good news is that mortgage REITs may be poised for a
comeback this year, as highertaxes on dividends and capital
gains for upper-income earners make these investments more
[Because REITs pay no corporate taxes, they aren't qualified for
the lower dividendtax rate . In addition, a big portion of REIT
dividends typically consist ofreturn of capital . This reduces the
investor's taxable income in the year the dividend is
received, lowers thecost basis of the investment and defers taxes
until the investment is sold.]
Here is a look at the five highest-yielding mortgage REITs:
1. Two Harbors
Two Harbors (
mainly invests in residential mortgage-backed securities (
) guaranteed by government agencies (such as Fannie Mae
). These represent 83% of the REIT's $15-billion portfolio.
Two Harbors also owns a 47% stake in
Silver Bay Realty (
, a new residential REIT.
During the third quarter of 2012, earnings per
share declined 22% to 31 cents from 40 cents a year earlier,
due to lower yields on recently-purchased mortgage
securities. The REIT's third quarter dividend of 36 cents a
share wasn't fully covered by earnings. Two Harbors declared
a 55-cent dividend for the fourth quarter, but may struggle
to maintain current payout if earnings from new investments
continue to slide. The company has $834 million of cash
to cover the dividend.
WesternAsset Mortgage Capital Corp.
Western Asset Mortgage Capital Corp. (
is new agency mortgage REIT is managed by Western Asset
Management Co., which is owned by
Legg Mason (NYSE
. During the September quarter, its first quarter as apublic
company, Western Asset generated solid earnings of $2.72 per
share, increased book value 10% to $21.76 a share
and paid an 85-cent dividend. The company's $4.6 billion
portfolio of mortgage securities consists mainly of 30-year
fixed-rate agency-guaranteed RMBS.
Because it is new, this REIT is experiencing lower
prepayment rates than its competitors. This helps Western
Asset maintain a favor spread between yields on investments
and borrowing costs. Management signaled confidence by
raising the dividend 5% in the December quarter to 90 cents a
share, while distributing an additional dividend of 22 cents
a share to investors.
3. American Capital Agency Corp.
American Capital Agency Corp. (Nasdaq: AGNC)
has a $90-billion investment portfolio and ranks as the
country's second-largest mortgage REIT. You may already be
familiar with thisstock as it's been featured in Carla
High Yield Investing
Investments consist mainly of agency-guaranteed RMBS. The
REIT is also highly leveraged, with debt of $80.3 billion
totaling more than seven times equity .
While the REIT's earnings more than doubled in the third
quarter to $3.98 per share from one year ago, most of the
increase was non-cash unrealized gains on investments.
Year-over-year Taxable earnings declined 27% to $1.36 a
share. American Capital has maintained its quarterly dividend
at $1.25 all year after cutting payout in June 2011 from
4. New York Mortgage Trust
New York Mortgage Trust (Nasdaq: NYMT)
invests in agency-guaranteed and non-agency RBMS, and owns a
$990-million investment portfolio. New York Mortgage changed
managers and used stock offering to grow its
portfolio in 2012. The result has been a
significantly-improved financial performance.
Third-quarter earnings jumped to 30 cents a share from no
earnings a year earlier, which were more than sufficient to
cover the 27-cent dividend. The REIT has also declared a
fourth-quarter dividend of 27 cents a share.
5. Resource Capital Corp.
Unlike the residential mortgage REITs mentioned above,
Resource Capital Corp. (
specializes in commercial real estate . Roughly 87% of
the $2.3 billion commercial real estate loan portfolio
consists of senior debt (the safest kind) and most of the
REIT's mortgage debt is adjustable rate, which provides some
protection against rising interest rates. This REIT is
externally managed by
Resource America Inc. (Nasdaq: REXI)
Resource Capital's September quarter earnings were 20
cents a share, the same as a year earlier. The REIT pays a
20-cent quarterly dividend. The company has made good
progress recently cleaning up its balance sheet , so
leverage has declined from a high of 10 times a few years ago
to 2.9 times today.
Risks to Consider:
Dividend cuts are common for mortgage REITs, so these
investments must be monitored carefully. The biggest risks come
from increases in interest rates and prepayment. Interest rates are
unlikely to rise significantly this year, but investors should be
cautious if prepayments rates accelerate since this affects the
REIT's earnings andability to pay dividends.
Action to Take -->
My top picks from this group are Western Asset and New York
Mortgage. Both are easily covering their dividends from earnings
and steadily improving their book value and financial performance.
Of the two REITs, Western Asset is likely the safer choice due to
its larger portfolio and skillful management of prepayment risk.
This mortgage REIT is also attractively priced at a 4% discount to
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