With 13%-16% Yields, These REITs Make More Sense Than Ever

Includes: CIM, NLY
by: Trade In Mexico

The economy in Europe is sliding towards a deep recession, China is slowing at a greater-than-expected rate, and recent data shows the U.S. economy is weakening. All these events have reduced any doubts that interest rates would be moving higher, anytime soon. The rates on U.S. Treasury bonds have responded by dropping to record lows of about 1.5% for the 10-year bond.

Under Obama's 2013 budget, taxes are due to rise and right around the same time, mandatory spending cuts are scheduled to take effect. The combination of reduced government spending and rising taxes is likely to even further reduce economic activity. More and more, the United States appears to be following Japan into what has been a very stagnant economy and low rate environment that could last for years.

That means high-yielding investments are likely to be a winning investment for years to come. When you consider that some mortgage real estate investment trusts are paying out yields of about 13% to 16%, that could lead to returns of nearly 50% in about 3 years. By contrast, investors who stay in cash, or money market accounts will earn next to nothing. Those who want the "safety" of the 10-year Treasury bond with rates near 1.5%, will generate returns of less than 5% in the same 3-year time period.

Investors who can accept some volatility in exchange for very generous dividends should be considering the following high-yielding mortgage REIT stocks now:

Annaly Capital Management, Inc. (NYSE:NLY)

Annaly is a favorite high yield stock for many investors. Even Mad Money's Jim Cramer thinks Annaly shares are worth buying. Of course, there are risks in any investment, but some concerns about Annaly seem exaggerated just because this company pays a very a high yield.

While an overly-generous dividend yield can be a warning sign, the dividend payout is easily explained with Annaly. The company is able to make large payments because (like almost all REITs), it uses leverage. By borrowing money, it is able to boost shareholder returns. Since it is borrowing money at very low rates to buy additional, generally stable mortgage assets, the risk is much lower than it would be if the company was using borrowed money to buy stocks, futures, precious metals, etc.

For truly risk-averse investors who still want a high yield, one strategy is to buy the stock, but also buy put options. The cost of buying puts will lower returns by a few points, but this combined strategy could diminish risk and still generate net returns of about 10%.

Key Data Points For Annaly:
Current Price: $16.76
52-Week Range: $14.05 to $18.79
Dividend: $2.20 annually which yields 13.1%
2012 Earnings Estimate: $1.97 per share
P/E Ratio: about 8 times earnings

Chimera Investment Corporation (NYSE:CIM)

Chimera offers a higher yield than Annaly, but also what many investors believe is... heightened risks. The company announced it would delay filing full-year financials with the Securities and Exchange Commission, stating that it needs to review data. It reassured investors by saying it did not expect book values, cash flow, dividends or taxable income to be changed. Because of that, Chimera is another choice for those seeking high yields in the mREIT sector.

Many investors consider Annaly to be the best managed company in the industry. That is a positive for Chimera, because it is externally managed by Fixed Income Discount Advisory Company, a wholly-owned subsidiary of Annaly Capital Management, Inc. By investing in Chimera, it appears investors are getting similar management, but with a higher yield. Once Chimera completes the filings, the overhang on the stock might be lifted.

Key Data Points For Chimera:
Current Price: $2.81
52-Week Range: $2.38 to $3.64
Dividend: 44 cents annually which yields 15.7%
2012 Earnings Estimate: 46 cents per share
P/E Ratio: about 7 times earnings

Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.

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