Mortgage REITs Thrive With 16.6% Yields

 |  Includes: AGNC, NLY
by: Todd Johnson

I attempt to simplify my investing to what works and has proven results. Mortgage real estate investment trusts currently offer up to 16.6% dividend yields. The high yields are, in part, due to the global economic troubles. This has forced investors to seek safety in the U.S. currency markets. This has forced U.S. Treasury Bond yields lower. Government Sponsored Entity (GSE) mortgage backed securities track the Treasury market yields. The net effect is mortgage real estate investment trusts are currently providing yields up to 16.6%.

Dividends do not lie. Below are the returns of two leading mortgage real estate investment trusts. These entities borrow at short term repurchase agreements and reinvest in higher paying GSE mortgage backed securities. The net yield margin is magnified by a leverage ranging from 5x to 8x.

Annaly Capital Management (NLY) has many operating units to profit from the mortgage financial industry. Annaly Capital Management has provided an average 7.9% total annualized return over the past 5 years. This beats the SP500 by an average of 7.5% per annum.

American Capital Agency (AGNC) is an agency mortgage real estate investment trust. Led by Gary Kain, American Capital Agency invests in only GSE securities which have an implicit U.S. Federal Government guarantee. The company has outperformed the SP500 by an average annualized 24.9% per the above table. The dividends are assumed to not be reinvested in the stock.

U.S. Treasury Bond Markets

The U.S. Treasury Bond markets indicate there is a high demand for Treasury securities. The global economy and the U.S. economy specifically have witnessed recent negative news. Here is a chart of the month long Treasury Bond yield changes:

Global Economic Problems Remain

The recent job growth numbers show a troublesome decrease. If jobs are not created, then the housing market can not bottom. The lack of job growth in Spain, Italy, and Greece are major global economic factors impacting the entire global economy. Spain's unemployment percentage, at the end of 2011, was 22.85%. This number is anticipated to increase to 24.3% in 2012. Italy's unemployment rate has hit 2001 levels. This leads to the market's concern of Spain and Italy's currencies.

Sovereign Credit Default Swaps

As reported by CMA Datavision on CNBC's 'Sovereign Credit Default Swap' quote page , Spain and Italy have elevated credit risk:

Spain and Italy's economic status will dictate Europe's hope of increasing global economic data. Until then, the currency risk has caused an influx into U.S. Treasury Bonds and GSE mortgage bond securities. This allows mortgage real estate investment trusts to profit as interest rates remain low and the companies can profit on the net yield margin.


I believe in buying stocks that pay dividends. Mortgage real estate investment trusts, unfortunately, are benefiting due to the negative global economic climate. Investors can take advantage of this circumstance. Investors can invest in this niche and obtain a 16.6% yield. Stocks such as Annaly Capital Management and American Capital Agency are paying high dividend payouts. The dividends are cash and help put together a real outperforming income portfolio.

Disclosure: I am long AGNC.