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I have been utilizing dividend screens to executive dividend capture strategies on high-yield stocks to improve my returns while lowering my risk. More and more frequently I arrive upon financial service companies with extremely high yields , frequently in double digits. The traditional metrics associated with dividend companies may not fully apply to mREITs so a unique analysis is required.

From mreit.com: an "mREIT is a Mortgage REIT ... which is an entity that specializes in investing solely in mortgage products (e.g. purchasing and selling mortgage-backed securities). Like other REITs (Real Estate Investment Trusts), an mREIT can only deal with mortgages and 90% of earnings must be paid out to its investors annually." Not all mREITs are created equal as the mortgages can be for residential, commercial, healthcare or many other underlying purposes. Since these companies are required to distribute such a high percent of earnings to investors, the yields are much higher than you find with more traditional companies; however, the stock prices and dividends can both be quite volatile.

This strategy can work in one of two ways: either you buy before the ex-date to receive the dividend or buy after if the stock declines far below the after-tax amount of the dividend. Buying the stock to receive the dividend is intuitive but many have contacted be requesting further details on the second strategy. Investopedia has a great example of how this works. To explain this, I will use AT&T (T) as an example. AT&T declared a $.43 dividend to shareholders of record on October 10th, 2011. On the ex-dividend date the stock price should decline by the after-tax dividend amount, with an assumed tax rate of approximately 15% because many dividends qualify for a lower tax rate. As a result, an investor would expect the stock price to decline by $.37 = [$.43 * (1-.15)]. If AT&T declined by more than $.37 in the absence of negative news you might have an attractive opportunity on your hands. Executing this strategy can generate outsized returns over short periods of times.

To focus on these opportunities I ran a screen with a focus on relative safety for the investments. Since this is a high yield quest I began with a specification of a dividend yield greater than four percent and an ex-dividend date within the next week. To provide some layer of safety I narrowed down the environment by looking at companies with market capitalizations greater than one billion, PEs between zero and twenty, and institutional holding percentage of at least twenty-five percent. While not a precise requirement, I prefer companies that have underperformed the S&P 500 year-to-date as it indicates limited downside relative to peers. As mentioned above I only included mREITs in the analysis. This is summarized below:

  • Dividend Yield ≥ 4.0%
  • Ex-Dividend Date = Next Week
  • Market Capitalization ≥ $1B
  • PE Ratio: 0-20
  • Institutional Ownership ≥ 25%
  • Industry: Mortgage Real Estate Investment Trusts

After applying this screen I arrived at six potential mREIT trades. Please consult my other recent ex-dividend articles for potential trades on more traditional companies. Although I envision these as short-term trading ideas, you still need to be careful. The information presented below should simply be a starting point for further research.

(Click chart to expand)

Chimera Investment Corporation (CIM): 16.06% - Ex-Dividend 12/27

Chimera is the cheapest of the group with the lowest price-to-book ratio; however, revenue is declining. Although net income and cash flows are solid, the negative free cash flow is troubling and should have been early warning signsof the 15% dividend decrease from last quarter. The extended dividend history is rocky at best and does not inspire much confidence in future payouts. If that was not enough of a reason to avoid Chimera the death blow is that the company missed the deadline for its third quarter 10Q over issues related to investment valuation. As I have stressed in the past with Groupon (GRPN), questionable accounting issues are the largest red flag to avoid a stock.

Ordinarily the high ROE and relative under performance would be buy signals but it appears if there are legitimate reasons why the stocks has tumbled this year. The .8 beta indicates that Chimera is the most volatile of the group but this is still less than the 1.0 of the overall market. Based upon the recent missed filing, I fully expect the volatility to increase.

Capstead Mortgage Corporation (CMO): 13.2% Yield - Ex-Dividend 12/28

MFA Financial, Inc. (MFA): 13.95% Yield - Ex-Dividend 12/28

National Health Investors Inc. (NHI): 5.73% Yield - Ex-Dividend 12/28

Overall these three mREITs offer minimal compelling ownership reasons relative to their peers. Capstead is the smallest of the pack but National Health Investors is only slightly larger. Unlike most other REITs NHI is a healthcare REIT, which explains the lower income and cash flows. Ordinarily I would consider NHI for further research but the high forward PE and low yield for the industry tells me to avoid the company. MFA is also in the middle of the pack like CMO except that it is bleeding cash.

Annaly Capital Management, Inc. (NLY): 13.46% Yield - Ex-Dividend 12/27

Annaly is the largest mREITs on the NYSE with a focus on agency issuances. Annaly has a subsidiary, FIDAC, which serves as the external manager for Chimera so I would avoid owning both for diversification purposes. As the financial metrics above indicate, Annaly is the leader in many categories due primarily to its size. Annaly's performance history is extremely impressive as the company has outperformed the S&P 500 by 600% since 2000 due to dividend reinvestment. Most important to me is the company's substantial free cash flows. It is true that Annaly did decrease its dividend by 15%, just like Chimera, but the 13% yield is still compelling. If I were to pick one mREIT to invest in it would be Annaly because it is the largest, has significant cash flows, a low beta, invests in agency securities, and underperformed year-to-date. The primary risk of Annaly relates to increasing prepayments and uncertain Fed policies but those are common industry fears. There are an abundance of bullish and bearish articles on Seeking Alpha that I highly recommend.

Starwood Property Trust, Inc. (STWD): 9.26% Yield - Ex-Dividend 12/28

Starwood is a relatively new REIT that went public in 2009. With only $170M in revenue and negative free cash flow, I would be careful with this company. The 92% growth rate is compelling but I prefer more mature companies to invest in. Ordinarily super high growth companies offer substantial return opportunities but investing in REITs is usually more about dividend safety than capital gains.


Disclosure: I am long T.

Source: 6 High Yield REITs: Which Is Best For 2012?