Having a stock we own increase in value is always nice as it gives us capital appreciation. However, I'm more concerned with income appreciation as I need money now to pay for my bills. I don't want to necessarily have to sell my stock and pay taxes, especially on short-term gains. So, selling covered calls allows us a nice option by allowing us to get paid while we wait for our stocks to either appreciate and/or disperse dividends. Moreover, these seven stocks in the mortgage REITs sector have just those qualities: They offer favorable valuations and nice dividends while we wait for the options to exercise. These companies include American Capital Agency (AGNC), Annaly Capital Management (NLY), Capstead Mortgage (CMO), Chimera Investment (CIM), CYS Investments (CYS), Hatteras Financial (HTS), and Invesco Mortgage Capital (IVR).
Chimera announced a positive surprise in its last earnings report by maintaining the same $.13 dividend as the prior quarter. The consensus was for at least a penny, if not a two cent drop to $.11, due to what seemed to be deteriorating market conditions. But Chimera proved otherwise, and this cheap stock is a great buy here, selling at 5x price/earnings, .8x price/book, an over 17% return on equity, and still close to 20% dividend. Moreover, strong recent insider buying is encouraging.
I still feel this is a great buy under $3/share, and selling the June 2012 $3 calls against those as the share price should rebound. Hatteras and American Capital also maintained their respective dividends from the last quarter. As I wrote here, American Capital is a buy at these levels trading at 5x price/earnings, achieving over 23% returns on equity, and approximately a 20% dividend yield. The June 2012 $28 calls are attractively priced ay $1.30 per contract.
I feel Hatteras is a good buy here as well at $27, since it trades at just 6.5x price/earnings, achieved over 16% returns on equity, and has a 15% dividend yield. The May 2012 27 calls are trading at $.95, which is a nice premium when considering another $2 in dividends should be received as an investor gets paid to wait.
Unfortunately, Annaly, Invesco Mortgage, Capstead Mortgage, and CYS Investments all decreased their dividend payout from the previous quarter. While all of these have seen a hit to their share price and came back to attractive valuations, the only one I can recommend is Annaly, due to its having by far the most experienced management team and credibility to assure investors that this will be resolved quickly. The stock is attractively priced at 7x forward price/earnings, 1x price/book, and a 15% dividend.
Overall, though, I still maintain that with the Federal Reserve maintaining low rates for at least another two years, according to Chairman Bernanke, all of these companies have favorable conditions going forward and should provide investors with a great dividend during that time as their covered calls look to execute.