Mortgage REIT stocks have been providing very high yields to shareholders for a number of years. In general, the companies in this industry borrow money at low rates, and use the leverage to purchase mortgage-backed securities which pay higher yields. Since these companies are set up as real estate investment trusts, it is a legal requirement that shareholders be paid most of the earnings made by the company. The combination of the use of leverage and the mandated high-dividend payout ratio creates a unique opportunity for investors to earn often much more than what is possible elsewhere.
As enticing as the yields are, income investors also often want to limit risk. The stocks in this sector have dropped in the past over a variety of concerns, which at times have been company-specific. One of the best examples of this is Chimera Investment (CIM) which has been late to file certain reports with the SEC. Other companies have seen stock values drop after announcing a dividend cut or a secondary capital raise. In order to avoid these company-specific risks and yet still earn very high yields, investors should consider two ETFs, which offer diversification by investing in several popular mortgage REIT stocks. Here is a closer look at two leading ETFs that are focused on the mortgage REIT sector, as well as a couple of top holdings in those funds:
iShares FTSE NAREIT Mortgage REITs Index ETF (REM) is an exchange traded fund that is invested in several mortgage real estate investment trusts. The top holdings in this fund include Annaly Capital (NLY), which represents about 22% of this fund's assets, and American Capital Agency (AGNC), which represents almost 18% of fund assets. It also has much smaller positions that amount to less than 5% of fund assets in names like Chimera Investment , MFA Financial (MFA) and others. The diversification that this fund offers lowers the company-specific risks that come with investing in individual stocks.
Here are some key points for REM:
Current share price: $14.74
The 52-week range is $11.28 to $14.77
Annual dividend: about $1.70 per share which yields around 12%
Market Vectors Mortgage REIT Income ETF (MORT) is another fund that focuses on this sector. It also has Annaly Capital as a top holding, which represents about 20% of this funds assets, and American Capital Agency, which represents around 15% of fund assets. The third largest holding is MFA Financial with about 5%. Chimera Investment rounds out the top holdings list with a position that equals about 3.74% of fund assets.
Here are some key points for MORT:
Current share price: $26.68
The 52-week range is $19.83 to $26.75
Annual dividend: about $3.20 per share which yields around 12%
Annaly Capital Management, Inc., is a leading mortgage real estate investment trust (REIT) company. This is often the favorite mREIT stock for many top investors like Jim Cramer, who recently said "Go buy Annaly. It has a great yield and it's better run." It is also the largest holding in the two ETFs discussed above. Annaly
pays a dividend of about $2.20 annually, which is equivalent to a yield of around 14.6%. While this yield is higher than what the mortgage ETF's offer, it does not provide the safety that is achieved through fund diversification.
Here are some key points for Annaly:
Current share price: $17.43
The 52-week range is $14.65 to $18.45
Earnings estimates for 2012: $1.95 per share
Earnings estimates for 2013: $2.02 per share
Annual dividend: $2.20 per share which yields 12.6%
American Capital Agency invests in commercial and residential mortgage loans and is set up as a real estate investment trust. This enables it to pay shareholders a generous dividend yield of just over 14%. This stock is a favorite pick for many investors and it is a top holding for the funds that invest in this sector. This company recently announced a secondary offering of about 32 million shares. This news created a small, but only temporary drop in the shares, which shows how much investor demand there is for high-yielding dividend stocks.
Here are some key points for American Capital Agency:
Current share price: $35.14
The 52-week range is $22.84 to $35.58
Earnings estimates for 2012: $4.02
Earnings estimates for 2013: $5.47
Annual dividend: $5 per share which yields about 14.1%
Chimera Investment Corporation shares have recently become a prime example of the company-specific risks that can hurt portfolio returns. This company has not filed required financial reports with the SEC on a timely basis and that appears to have hurt investor confidence as this stock drifts lower and lower. Chimera shares recently hit a new 52-week low, which is particularly difficult for shareholders, especially since many mortgage REIT stocks are trading near 52-week highs.
Here are some key points for Chimera:
Current share price: $2.16
The 52-week range is $1.81 to $3.30
Earnings estimates for 2012: 47 cents per share
Earnings estimates for 2013: 45 cents per share
Annual dividend: 36 cents per share which yields 15.8%
Data is sourced from Yahoo Finance.
Disclaimer: No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.