Dividend Cuts With mREITs Means These High-Yielders Are Strong Options

Includes: AINV, PSEC
by: Hawkinvest

When the Federal Reserve's QE3 program was put into play earlier this year, it caused mortgage rates to drop far enough to make refinancing a smart move for many homeowners. A wave of recent refinancings has caused higher rate mortgages held by many mortgage REIT companies to see prepayments, and that means the profit margins are shrinking. Since mortgage REIT companies pay a high percentage of earnings out to shareholders, a drop in profits can result in an immediate need to cut the dividend.

Many popular mortgage REIT stocks have cut the dividend payout in response to the changing industry dynamics, and the share prices have been under pressure. While it seemed like this sector has stabilized, it might be too soon to invest heavily as fresh concerns about additional dividend cuts have recently surfaced and Haterras Financial (NYSE:HTS) just announced it would cut the quarterly dividend down from 80 cents to 70 cents per share. Famed investor Jeff Gundlach believes the mortgage REIT sector will see additional dividend cuts and quoting him a recent Barron's.com article states:

"I've been negative on mortgage REITs for a while, and I believe that the dividends on agency mortgage REITs are almost certain to be cut further," Gundlach said on Monday. "And in my experience REIT prices do not go up when their dividends are going down."

The risk for mREIT investors is that additional dividend cuts will be required and that a gradual approach of cuts could mean that share prices will continue to drift lower. For example, Annaly Capital Management (NYSE:NLY) has already cut the dividend earlier this year but some believe that more cuts are possible. With uncertainty likely to linger with this sector for a while longer, it makes sense for investors to consider high-yielding stocks that could be ideal alternatives. Some business development companies or "BDC's" offer similar yields but are not coming under pressure to cut dividends. Here are a couple of "BDC's to consider now:

Prospect Capital (NASDAQ:PSEC) is a business development company or "BDC" that invests in a wide range of companies. In stark contrast to the dividend cuts seen in the mortgage REIT sector, this company just announced it would raise the dividend by about 8.2%. Another big advantage of owning this stock is that it pays a dividend every month, while most are paid on a quarterly basis. This provides a more
frequent income stream for investors-- which is ideal since many investors pay their bills monthly and want a more steady income stream. Prospect Capital makes debt and equity investments in a
number of industries which includes healthcare, financial services, energy, and manufacturing. By making investments in many different sectors, this company reduces risks through diversification. This
stock looks attractive because of the high yield, and also because it trades below book value, which is about $10.83 per share. It is also worth noting that insiders have been buying shares recently. On November 15, Brian Oswald (an officer) purchased 19,500 shares in a transaction valued at $198,000 and on November 11, Grier Eliasek (an officer) purchased 9,057 shares in a transaction valued at $95,641.

Here are some key points for PSEC:
Current share price: $10.50
The 52 week range is $9 to $12.25
Earnings estimates for 2012: $1.48 per share
Earnings estimates for 2013: $1.23 per share
Annual dividend: $1.22 per share which yields 11.4%

Apollo Investment Corporation (NASDAQ:AINV) shares have been trending higher, which is a stark contrast to the mortgage REIT sector, since many of those stocks have been trending down. Apollo is another popular business development company and it invests in many industries such as restaurants, food distribution, healthcare, technology and others. By making debt and equity investments it is able to generate profits
through interest payments and from capital gains on the sale of assets. It has even made investments in some well-known publicly-traded companies like Chesapeake Energy Corporation (NYSE:CHK), and Miller Energy Resources (NYSE:MILL), just to name a couple of companies in its portfolio. Apollo has been reporting solid financial results. For the quarter ended on September 30, 2012, it had net investment income of 22 cents per share which compares favorably to the 20.1 cents it earned in the prior quarter. It also saw net asset value jump to $8.46 per share. This level of earnings provides enough coverage for the company to continue paying a 20 cent dividend on a quarterly basis.

Here are some key points for AINV:
Current share price: $8.28
The 52 week range is $5.97 to $8.35
Earnings estimates for 2013: 84 cents per share
Earnings estimates for 2014: 88 cents per share
Annual dividend: 80 cents per share which yields 9.7%

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.

Disclaimer: Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for
informational purposes only. You should always consult a financial advisor.