Capstead Mortgage to Benefit from the Fed's Interest Rate Decision

| About: Capstead Mortgage (CMO)

Looking for a strong dividend paying stock that will benefit from the Fed's historically low interest rate program? With the recession apparently over, the Federal Reserve on Wednesday held a key interest rate at a record low and again pledged to keep it there for an "extended period" to foster the fragile economic recovery.

Capstead Mortgage, (NYSE:CMO), a mortgage REIT from our High Dividend Stocks by Sector tables, (they're in our Financials table), now yielding 17.79%, has the highest dividend yield in the Mortgage Investment sub-industry. CMO invests in residential Adjustable Rate Mortgages issued and backed by U.S. government agencies, Fannie Mae, Freddie Mac, and Ginnie Mae.

They recently reported a modest decline in Q3 earnings, (down 3.44%), but increased their book value to $12.21 per common unit, which brings their current Price/Book to 1.05, in line with the other 3 high dividend stocks in their peer group: Hatteras Financial, (NYSE:HTS), Annaly Capital, (NYSE:NLY), and MFA Financial , (NYSE:MFA), whose Price/Book values are running from 1.01 to 1.09.

CMO earned $.56/common unit in Q3 and declared a $.56 payout as well, in line with the high payout ratios mandated for REIT's, in return for not paying corporate taxes.

Businesswire reported these promising comments from CEO Andrew F. Jacobs:

Conditions have improved considerably during 2009 for investors in agency-guaranteed residential securities. We have experienced significant pricing gains in our ARM portfolio and the availability of financing at attractive interest rates has dramatically improved. For the quarter, our investment portfolio grew to $7.92 billion as a result of portfolio acquisitions in excess of runoff and the aforementioned pricing gains.

Additionally, during the third quarter we were successful in raising $71 million in new common equity under our continuous offering program, all of which was accretive to our book value, while contributing to a modest decline in leverage at the end of the quarter. Even as yields on our current-reset ARM securities continued resetting to more current interest rates this quarter, the effects on our financing spreads were largely offset by declining interest rates on our short-term borrowings.

Commenting on the current and near-future interest rate environment, Mr. Jacobs said that,

we anticipate that yields on our portfolio will continue declining throughout much of 2010, with these declines offset to a large degree by lower interest rates on our borrowings as we continue to benefit from the low overall rate environment and from the termination of our higher-rate swap positions.

There are options available for CMO, however the covered call premiums aren't very juicy. Cash-secured puts currently have higher premiums: The Feb. 2010 $12.50 put options are currently worth a $.75 bid, which equals a breakeven of $11.75. CMO's current $.56/unit payout would equal a 19.1% payout at the $11.75 level, although there's no guarantee that they'll keep their distribution at $.56.

Disclosure: Author is long shares of CMO. This article is written for informational purposes only.