Looking To Boost Your Current Income Stream? Try These 2 REITs

Includes: AGNC, CIM, CYS, NLY
by: Matt Schilling

When it comes to income there is only one primary catalyst potential investors should consider before establishing a position in what they think could be the next great dividend paying stock and that is yield. Today, I'm going to focus on two REITs that have demonstrated very nice yields and excellent margins over the last 12 months, despite reducing their payouts at least once over that same period.

Annaly Capital Management (NYSE:NLY) - closed trading at $16.91/share on Wednesday, after it was noted on Tuesday that along with CYS Investments (NYSE:CYS), both companies could clearly benefit from the low interest rates currently being seen in the residential mortgage markets. The most attractive variable for NLY is clearly the company's dividend and yield of 13.10% ($2.20), which has been reduced three times since the June 28, 2011, distribution. Aside from the company's yield, there really isn't much room to grow, which is okay considering we're looking at NLY from an income perspective. The second variable to consider in terms of NLY are the company's margins. Over the last 12 months, NLY has demonstrated an operating margin of 60.25% and a profit margin of 50.98%, which are both good numbers but still lag behind the margins of American Capital Agency Corp. (NASDAQ:AGNC), which demonstrated an operating margin of 88.47% and a profit margin of 87.92%. Although the company demonstrated a very promising quarter, they'd need to put several more positive quarters together before potential investors should establish larger positions. It should also be noted that on August 3 the company received a downgrade from Wunderlich, even though the company raised its price target to $18/share.

Chimera Investment Corp. (NYSE:CIM) - closed trading at $2.44/share on Wednesday after the company provided an update on the restatement of its previous earnings reports earlier in the day on Tuesday. For the income investor, the most attractive variable when it comes to CIM is the company's dividend and yield of 15.50% ($0.36), which has been reduced five times since the September 30, 2010, distribution. Aside from the company's yield, investors are hoping CIM can demonstrate better-than-expected results from the restatement of earnings and all eyes are going to be on the FFO numbers from previous quarters. One thing potential investors should also consider is the company's margins over the last 12 months. CIM demonstrated profit margins of 90.42% and an operating margin of 90.53%, which were both excellent in my opinion. I personally think that not only will NLY and CYS benefit from the record-low interest rates, many of the other REITs, including CIM, will also benefit from the position rates are currently in. With the Federal Reserve standing pat on its current interest rate policy and the continued reduction of rates by the ECB, rates have the ability to be sustained at current levels for some time, which will in turn benefit the REIT sector as a whole.

Final Analysis

I think both companies possess excellent long-term potential from an income standpoint although there are a few things to consider that could result in subsequent sell-offs of either stock. The first catalyst to consider is obviously earnings and EPS trends. Both NLY and CIM have demonstrated previous EPS trends that were only okay in my opinion and if either company begins to demonstrate negative earnings we could see sharp sell-offs. The second and final catalyst to consider is the possibility of a continued reduction in each company's dividend. If either company reduces its dividend over the next 12-18 months, income investors may begin to reconsider the size of their position. Are the yields still higher than most blue chip companies? Yes they are, although a continued reduction in either company's dividend may eventually result in a 7% - 10% yield versus the 13% - 15% yields we are currently seeing. Potential investors should start out with a small to mid-sized position and add to that position as dividend and earnings dates draw near.

Disclosure: I am long CIM, AGNC.