Over the years, REITs have been a nice option for those investors who are seeking a steady and consistent income along with the potential for share growth. Because these entities are required to pay out 90% of their taxable income to their investors, those who possess these shares are often rewarded with nice dividend yields.
For those who already own REIT shares, or are considering them as an addition to their portfolio, there is good news ahead. With the Fed's decision to keep the federal funds rate at lows of at or near 0% through at least 2014, the next year or two should continue to offer nice returns for REIT investors.
One of my favorites in this particular sector is American Capital Agency (AGNC). In this article I will discuss why - in spite of the fact that it possesses a high percentage of non-agency backed securities in its portfolio - this company could be a good choice for those who seek both income and growth from their REIT shares.
A Closer Look at American Capital Agency
American Capital is a REIT that invests primarily in collateralized mortgage obligations as well as in residential mortgage pass-throughs. The firm funds its investments mainly via short-term borrowed capital that is structured as repurchase agreements.
The company is a strong contender in the REIT segment. In the first quarter of 2012, the company reported a net income of over $640 million. With earnings per share of nearly 6.7 and a dividend yield in excess of 15%, American Capital has a good strong foundation.
American Capital has also obtained benefits by buying HARP (Home Affordable Refinance Program) and HARP 2 securities. These are backed by mortgages that possess fairly low balances - those that are below $125,000 - or high LTV (loan to value) ratios. This has helped the company to protect itself from the potential residential mortgage pre-payment risk that it could face in the residential mortgage market.
Currently, the shares of American Capital are trading at just above $32, which is close to its 52-week high and actually a tad above its 1 year target estimate of $32.11, although I feel that there may be more room for growth.
One potential risk that investors should be mindful of is that, by increasing its leverage rates - from 7.6x to nearly 8.5x - over the past year or so for the purpose of maintaining and growing income levels, American Capital may consider trimming its dividend. This, however, still remains to be seen as the company could still be able to push forward without needing to do so.
The Competitive Environment for REITs
Because the REIT sector tends to thrive in a low interest rate environment, there are a number of other good opportunities that are also available to investors to supplement or diversity within their REIT portfolios.
ARMOUR Residential REIT (ARR), for instance, could be a nice option for those who are seeking high dividend returns along with a good probability for growth. The company is paying investors a monthly cash dividend of $0.10 per share which comes out to a dividend yield in excess of 17% and a 52-week dividend yield of more than 19%.
Another potential winner in the REIT arena is Chimera (CIM). Although the firm has nearly 75% non-agency backed securities in its portfolio, Chimera's strong and consistent dividend is currently paying its investors a 16% yield.
Dynex Capital (DX) is yet another REIT that holds impressive financials, making it a potential candidate for REIT diversification. The company's 12% dividend yield represents growth of over 38% over the past five years. In addition, Dynex's net income has also been rising steadily - from $18 million to roughly $40 million - in just a short two year period of time.
An area in the REIT sector that investors sometimes seem to bypass involves those that focus in the purchase and management of apartment complexes. Yet today, with unemployment still high and continued home foreclosures, the need for rental housing is on the rise.
One REIT that has been taking advantage of this rental housing opportunity is UDR (UDR). The company has nearly $800 million in available cash and credit that's due in large part to its 95% plus occupancy rate for its apartment complex properties.
One caveat, though, could be the resignation announcement by David Messenger, the company CEO. While UDR shares have been trading at a much higher than normal volume, and the stock is now rated as a hold, there are still a number of areas where the company is strong - including its impressive record of earnings per share growth as well as its high growth in net income.
The Bottom Line
Regardless of which way the market moves, those who own REIT shares are likely to profit. In addition to steady cash flow, REITs are also typically a great hedge against inflation. And for investors who are comfortable in taking on a bit more risk, the rewards can come not just in the form of income, but also growth.
I feel that American Capital could still be a good buy - especially if share prices fall to below $30. And, while the company has increased its leverage, the dividend still remains strong, providing investors with a nice steady income and yield. As long as the economy remains in its low interest rate environment - estimated for at least another 1-2 years - REITs should be considered as a staple for income seeking investors.