"More money has been lost reaching for yield than at the
point of a gun."
Raymond DeVoe Jr., Market Strategist
Few quotes are more insightful, yet few quotes are more
ignored. I continually see investors lose money reaching for
Some investors have been attracted to mortgage REITs thanks to
their juicy yields. But the yield comes tethered to unacceptable
risk. Mortgage REITs borrow short-term funds at a floating rate.
They then use their funds to buy long-term fixed-rate
To goose cash flow, mortgage REITs employ debt - and a lot of
it. Debt-to-equity ratios of 500%, 600%, or even 1,000% are
common in the industry. Leverage is a wonderful tool when market
winds are at your back. But when winds turn to frontal gales,
cash flow and asset value quickly dissipates.
Today, the winds are shifting to front facing for the mortgage
REIT industry. This is bad news for many income investors who own
That's because mortgage REITS make big profits when interest
rates fall. Today, interest rates are rising, and they're
suffering as a result. At the same time, the values of their
mortgage-backed securities are falling. And that increases the
risk of margin calls.
Annaly Capital (
, a popular mortgage REIT.
A couple years ago, Annaly investors were receiving per-share
quarterly dividends between $0.60 and $0.70. Based on an average
share price of $17.50, a $0.65 quarterly produced a 15% yield on
I'm sure Annaly's juicy payout and lush yield attracted many
unsophisticated investors, who where drawn in like moths to a
flame. Many of these investors have since been burned.
Annaly's quarterly dividend has been continually reduced over
the past two years. Indeed, the dividend has been reduced in
seven of the past eight quarters. That 15% yield has been reduced
to 9% on a $17.50 cost basis. Meanwhile the stock has plunged
I'm hardly surprised investors are suffering loses. Annaly
reported a 0.98% net interest spread in the second quarter. In
the same year-ago quarter, the net interest spread was 1.54%. I
expect the spread to continue to narrow as interest rates
continue to rise.
To be blunt, I dislike the mortgage-REIT model. I don't even
view mortgage REITs as REITS. They're really financial firms that
leverage their portfolio of securities to unconscionable
A REIT, properly speaking, should be viewed as a real estate
investment. That's just one of many reasons that I like to own
REITs that actually own property. All the REITs in the
High Yield Wealth
portfolio are landlords that own actual property and focus on
commercial real estate.
Gladstone Commercial Corporation (
is just one of these REITs that I do recommend. The company owns
73 cash generating commercial properties.
What's more, Gladstone doesn't whipsaw investors: Dividends
are paid monthly, and have been continually maintained at $0.125
per month for the past six years. Investors are assured of a
consistent 8% yield on their investment. It's not 15% one year,
and 5% the next.
If you want a higher-yield real estate investment, buy a
commercial REIT. Don't reach for yield in a highly leveraged
mortgage REIT masquerading as a real estate investment. Their
risks simply aren't commensurate with their reward.