In the recent market correction, many dividend stocks have experienced a sharp pullback due to various concerns, including the potential that tax rates will rise on dividend income. This is one of the many risk factors that surround the "Fiscal Cliff". However, there is a strong chance that the current tax rate of 15% won't jump as high as some investors fear, if a deal is reached. Plus, certain dividend stocks could still offer the best returns for investors. That is why the recent pullback is worth buying in a select dividend stocks.
Hatteras Financial Corp (NYSE:HTS) is set up as a real estate investment trust "REIT", that is focused on mortgage securities. It invests in mortgage securities which are issued or guaranteed by U.S Government agencies or U.S. Government-sponsored entities, like Fannie Mae or Freddie Mac. As a real estate investment trust, it is required to pay at least 90% of what it earns out to shareholders. This is one reason why stocks in this sector are so popular with income investors. The other reason why Hatteras Financial is able to provide a higher than average yield is because it uses leverage. By borrowing money at low rates and investing it in higher-yielding assets, this company is able to significantly increase the total return.
Hatteras Financial shares were trading around $28.50 in September, but the recent market drop and concerns over profit margins for mortgage REIT stocks have put pressure on the stock, it now trades for about $26. Mortgage REIT companies are being impacted by QE3, which is creating even lower interest rates. That can cause mortgages to be refinanced at reduced rates, leading to profit margin pressure. However, it seems that investors might have overreacted because low rates also benefit these companies as it keeps their borrowing rates low as well. Like most companies in this sector, Hatteras does have pre-payment risk; however, the company works to limit those risks. Hatteras states that: "Our expertise in asset selection, particularly in identifying relative value discrepancies in the MBS market, helps to mitigate prepayment risk." Furthermore, the company has already reduced the dividend to what is likely to be a more sustainable level at 80 cents per quarter. Unless there are significant new shifts in interest rates, the company could be well positioned to continue offering shareholders a yield that outperforms most other investments.
A couple of recent signs indicate that the sell-off is overdone especially as this stock was recently upgraded by multiple analysts and it is also seeing solid insider buying. (Insiders probably would not be buying now if they expected further dividend cuts in the foreseeable future):
On November 14, Kenneth Steele (an officer) purchased 2,000 shares at $24.40 each for a transaction value of $48,800. On the same day, Benjamin Hough (an officer), purchased 10,000 shares at $24.87 each, in a transaction worth $248,700. Also on the same day, Michael Hough, (an officer) purchased 10,000 shares at $24.84 each in a transaction worth $248,400.
On November 16, analysts at Wells Fargo (NYSE:WFC) upgraded Hatteras Financial shares from market perform to outperform. Wells Fargo cited the drop in the stock price as a reason for the upgrade. On November 5, analysts at Ladenburg also upgraded the stock from neutral to buy.
Here are some key points for HTS:
Current share price: $26.07
The 52 week range is $23.85 to $29.68
Earnings estimates for 2012: $4.20 per share
Earnings estimates for 2013: $4.17 per share
Annual dividend: $3.20 per share which yields about 13%
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.