Does it make sense to reinvest dividends received from a Real Estate Investment Trust (REIT) or should you save the money in cash? This article is a companion article to another article I wrote last year concerning business development companies (BDCS). I thought it would be worthwhile to put some of the major REITs under the same test and see if these companies do better or worse than their 1940 Act (pdf) cousins.
The companies to be examined in this article are American Capital Agency Corp (AGNC), Annaly Capital Management, Inc (NLY), Invesco Mortgage Capital Inc (IVR), Capstead Mortgage Corporation (CMO) and Hatteras Financial Corp (HTS). Two of these companies have been around for over ten years (NLY and CMO) while the other three companies all IPOd during or after the financial crisis began in 2007.
- I gathered a small list of publicly traded REITs. These companies all have market caps above $2 billion and primarily invest in residential mortgage securities.
- Like the previous study, I used 3 intervals - Since Inception, 2-Year and 5-Year performance. If a stock has been listed for less than 2 or 5 years, I put "N/A" into the box. The data sources for this information are again Yahoo, Google and SeekingAlpha (you could probably run this comparison with a few simple Bloomberg commands if it is available to you).
- Returns are calculated based on Total Return (dividends + price changes). There are two minor tweaks to the calculation
- Variant one assumes you do not reinvest dividends and keep the money in a separate account.
- Variant two assumes you reinvest each dividend from the stock into the company. NOTE: In cases where I could not pull in the Pay Date of the dividend, the calculation sets the reinvestment price = Ex-Date price.
- I ran the test based on the data above and produced this chart below.
In the chart above, each section where you could have realized the maximum total return is in Bold. The most surprising thing I have seen from this study is that you would have come out ahead from reinvesting your money in each REIT listed above. This is in sharp contrast to the mixed results from looking at other companies. Furthermore, all of the securities have had a positive total return for each interval examined. Perhaps I should have spent more time studying REIT securities instead of BDCs!
Some limitations of this study must be mentioned. These results do not take into account tax considerations so your personal returns will vary. Also, these results do not assume that cash is placed into an interest bearing account so the non-dividend results should be higher (but it would only be closer if HTS was used). One other very important item to mention is that this study is biased. I chose my list of mortgage REITs based on market cap. This means that other REITs that may have had subpar results are not included in this study. I encourage people to find some of these REITs and I will try to run their numbers in the comments below.
In part 2 of my BDC article, I re-ran the above test with a yield-optimization focus. This means that the reinvestment-decision is based on the current yield of the stock at the time the stock goes ex-dividend. Quick Overview:
- Run the stocks through the same Since Inception, 5-year and 2-year intervals with the reinvestment decision range of 1% to 20% dividend yields.
- Time period runs until 7/11/12.
- The chart is below
Having the ability to dynamically choose the yield did add a return enhancement to the analysis. It appears the average sweet spot yield over the past two years has been about 12.5%. AGNC emerges as a top stock over the past two years in this group and it has been profitable for an investor to keep money in there.
Mortgage REITs are a very popular investment topic at the moment. From studying them I can see that they have provided investors with some massive returns since their respective inceptions. As a word of caution, these stocks are dependent on the U.S. economy, the guarantees of the U.S. Government for Agency Mortgages and have a high interest rate risk (if the Fed raises the rate suddenly or if the yield curve inverts, they could be in trouble). Before investing in any of these securities, make sure you understand the risks and determine if they are an appropriate investment.