Dividend Play with a Great Yield

Every now and then I come across an investment that yields a solid return and has very little media hype. I found a smallcap dividend play about a year ago with a very healthy yield.

The company is called Hatteras Financial Corp (HTS). Hatteras Financial is a real estate investment trust (REIT) that invests in mortgage backed securities that are guaranteed by the US government or a governmental agency. The company does have some risk as some of its securities are backed by Fannie Mae (FNM) and Freddie Mac (FRE).

The main risk in investing in Hatteras is if the US government defaults on its obligations. Hatteras offers little in price appreciation as the stock has fluctuated between 15 and 25 for the past year. The dividend has been solid over the past year currently yielding almost 17%. Normally high yields such as this concern me but the company was able to pay out a double digit yield over the previous 12 months.

The company does have a short dividend payment history but if the past year is any indication of the future, Hatteras may be a promising dividend play.

Comments

[Bill Coppedge:]

Risks to check out with Hatteras before I would consider investing (I have not):

How many times levered is Hatteras?
Do they have yield curve (duration) risk? i.e.
Do they invest in fixed rate or arm MBS? (Just checked - it appears they adjust in ARMS only - that is good as it diminishes duration - funding mismatch risk)
Does Hatteras use short term repos to finance, or do they have longer term more stable debt for funding?

Annaly (NLY) is another residential mortgage backed REIT. Their chairman's monthly comments about the state of the markets is a must read - he is very smart and steered his ship well through all of these bad markets.

Good luck. I do not own either of these, and have no dog in the fight..

May 27 06:40 AM

[Alan Young:]

In addition to NLY, which returns a relatively modest 14% dividend, you can get the same 17-18% from the same type of business at ANH and AGNC. (I hold all three).

From what I understand, the only significant risk is the yield curve, which hypothetically could make the short-term leverage borrowing cost approach the return on the mortgages. Not likely anytime soon, though.

May 27 04:03 PM

[RLLH:]

I would also recommend NLY in this area. They had to cut the dividend a few years back, but have always paid one, and have raised it back to a quite respectable level. And they are conservatives in a risky business.

May 27 04:18 PM

[Obamitall:]

Agree with all the above comments. I have had HTS in my portfolio in the past, but am somewhat disappointed that the investor relations department does little to inform, and the volume of trades is small so that it is not as liquid as nLY, shich I have owned for years.

May 28 08:23 AM