Invesco Mortgage Capital's 25% Yield Is Just A Smokescreen

Sep.28.11 | About: Invesco Mortgage (IVR)

When browsing through REITs, Invesco Mortgage Capital's (NYSE:IVR) 25 percent dividend yield stands out. I mean, who can argue with 25 percent?

However, when looking at Invesco's price performance compared to other mREITs, you can see that their monster dividend yield is more a result of bearish investors than a well run mREIT. In this article, I explain how other mREITs may be better investments than Invesco.

Click to enlarge
From the graph (click to enlarge), it is obvious that IVR has been underperforming its competitors over the past three months. Annaly (NYSE:NLY), Hatteras (NYSE:HTS), and American Capital Agency Corp (NASDAQ:AGNC) shares have dropped between an adjusted 4 percent and 7 percent, which is not terrible for a bear market. For a security to satisfy an income investor's needs, it has to maintain its value while producing a good yield. I believe NLY, AGNC, and HTS can still accomplish this, but Invesco Mortgage Capital looks dilutive at this point. High dividend yields are important, but a stable price in exchange for a lower dividend yield is well worth it every time. When the lower dividend alternatives yield beween 13.8 percent (Annaly) and 20.6 percent (American Capital Agency) you are not sacrificing much for a reliable mREIT.

With interest rates essentially guaranteed to stay low for at least another two years, investors are looking to the stock market more and more to achieve a good yield on their investments. Banks are paying next to nothing in interest and yields in the bond market are at record lows. Investing in mREITs will become more and more popular since they have very high dividend yields and have relatively little risk compared to other investments with similar returns. As more investors sell out of gold and silver and look for a new high return asset class to invest in, the high dividends of mREITs will likely attract investors and increase demand, which will increase price.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.