Mortgage Stocks: High Risk, High Payouts

by: Simon Monger

The housing market isn’t exactly a bright spot in the U.S. economy, but the lack of popularity means the sector is paying out a lot to attract investors. Mortgage stocks have the highest average dividend yield in the U.S. marketplace at 10.9%. Meanwhile, the sector trades at a cheap 10.1x average P/E making it a deal if the economy recovers.

Some significant dividend-payers in the sector include:

  • American Capital Agency Corp (NASDAQ: AGNC)
  • CYS Investments Inc. (NYSE: CYS)
  • Northstar Realty Finance Corp (NYSE: NRF)
  • Newcastle Investment Corp (NYSE: NCT)
  • Capstead Mortgage Corporation (NYSE: CMO)
  • Hatteras Financial Corp (NYSE: HTS)
  • Annaly Capital Management Inc. (NYSE: NLY)
  • PennyMac Mortgage Investment Trust (NYSE: PMT)

A Value Trap…

The real estate industry is being hit by two big trends. First, there are fewer homebuyers due to poor employment figures and a tight lending environment. And even if buyers are available, many are waiting on the sidelines until the market stabilizes. Second, more and more homes are coming onto the market as banks increase their foreclosures rates.

And things aren’t getting much better quite yet. According to the National Association of Realtors, U.S. home prices fell in three-quarters of all metro areas during the third quarter of this year. Meanwhile, the median price of homes fell 4.7% and foreclosures continue to make up approximately one-third of all home sales at the resale level.

Or Great Value?

The silver lining is the strong affordability of homes right now. The Federal Reserve has kept long-term interest rates very low and signaled that it intends to keep rates low for the foreseeable future. This has made mortgages very affordable and thereby made the likelihood of repayment arguably higher than it was with earlier loans.

Meanwhile, some investors argue that much of the bad news may already be priced in to the sector. As a result, any positive news from a recovery could provide a strong catalyst for the stocks to recovery. And of course, the dividend payouts are very attractive these days – assuming the companies can afford to make the payout.

Putting the Pieces Together

In the end, the real estate market may have a ways to go before it recovers. But that’s no secret. Many real estate and mortgage stocks are bargain priced, which makes some investors question whether or not the downside is already priced in. If so, many of these stocks may represent great opportunities due to their high dividend payouts.

But still, investors should be very careful in selecting the mortgage stocks they purchase. And mortgage stocks as a whole should only be one part of a diversified portfolio. Whether or not the market recovers is anyone’s guess, but some stocks appears to be compelling opportunities in the meantime.

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