As an income investor, the
dividend
yields are tempting.
I've found yields of 14.3%... 15.1%... and even 19.6%. Annual
yields that high almost sound too good to be true, but the
securities offering them are a proven investment. The businesses
behind these dividends have been solid for years. And their share
prices have stayed in a relatively narrow range, too.
In fact, these high-yield securities were the darlings of the
market
during the
real estate
boom. Investors couldn't get enough of these lucrative income
plays.
They may have come under pressure during the real estate bust, but
they quickly regained their popularity once the
economy
started to recover.
I'm talking about the popular
mortgage
real estate investment trusts (
M-REITs
). This special breed of REITs borrows at low short-term interest
rates and invests in pools of mortgages backed by
Fannie Mae
and
Freddie Mac
(which are in turn backed by Uncle Sam) at higher long-term rates.
But even though they offer yields well into the double digits, I'm
still not buying them.
Let me explain...
Last year, my mortgage servicer,
Wells Fargo (NYSE:
WFC
)
, started calling me. I wasn't behind on my mortgage payments;
quite the contrary -- I had never been late with a mortgage payment
in 17 years.
It wanted me to refinance my existing mortgage. Once I crawled
through the offer, I realized it was a good deal for me.
Wells wasn't going to charge me an
appraisal
fee -- it already had done the homework to show I had more than 50%
equity in my home. And there were no other fees, hidden or
otherwise, to refinance my existing debt.
At a lower interest rate for a 15-year mortgage, I could save a lot
of money off my monthly bill. But that wasn't my plan. I realized
that I could pay my current amount, prepaying additional
principal
on the loan, and shave nearly six years off the life of my
mortgage.
I would save tens of thousands of dollars in interest payments and
pay off my mortgage in roughly nine years. It seemed like a
no-brainer.
But something about the offer bothered me. So just to be sure, I
called a friend of mine who use to work as a mortgage broker.
My first question to him was: "What's in it for Wells Fargo? Why
would they give me this deal?"
He explained that there was a dearth of new high-quality mortgages.
Banks that issued mortgages needed good new mortgages to repackage
and sell. I had a
credit rating
above 800. I had a job. I had never missed a mortgage payment and
had a lot of equity in my home. I was a quality mortgagee.
Naturally, my second question was: "Who loses in this deal?"
One loser, he explained, was the investor(s) who owned the income
stream from my original mortgage. By paying off my original
mortgage early, I cut them off from 13 more years of 6%-plus
interest payments.
Another loser could be the new investor(s) who bought my refinanced
mortgage. After being used to high-income streams fueled by a high
percentage of subprime loans, they would have to settle for far
lower yields on their investments.
This is exactly what M-REITs are seeing. Remember, they invest in
pools of mortgages. As mortgage rates fall, so does their income.
My refinance story -- playing out across the country -- is just one
of the reasons why popular mortgage REITs such as
Annaly Capital Management (NYSE:
NLY
)
and
American Capital Agency (Nasdaq:
AGNC
)
have underperformed the market in the past months. Below is a chart
of the
Market Vectors Mortgage REIT
ETF (NYSE:
MORT
)
-- a
proxy
for mortgage REITs -- compared with the S&P 500
Index
.
Despite paying yields as high as 19.1%, mortgage REITs have
dramatically underperformed the market in the past few months.
Mortgage REITs may continue to struggle if rates for new and
refinanced mortgages continue to remain low. And to top it off, the
government just announced a new plan to help underwater homeowners
refinance their mortgages. A move that could further hurt M-REITs.
Meanwhile, Annaly already cut its quarterly dividend to $0.60 from
$0.65 per share. American Capital has been able to maintain its
dividend for now. But I feel both dividends are more likely to see
downward adjustments than to see growth.
Action to Take -->
So though I think that someday these M-REITs will make a nice
addition to my real-money portfolio within my
Daily Paycheck
advisory, for now I'm steering clear. Until the market cools and
interest rates rebound, I think these high-yielding securities are
better left alone.
-- Amy Calistri
P.S. -- In the the latest issue of my premium newsletter, The
Daily Paycheck, I tell my readers about a high-yield investment
that's much safer than M-REITs. To learn more about my advisory,
and how StreetAuthority co-founder Paul Tracy made $112.77 a day in
2010 using my Daily Paycheck Strategy, make sure to visit this link
now.
Disclosure: Neither Amy Calistri nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.