Cramer Has A Buy Rating On This $7 Stock That Yields 16%

Aug.30.12 | About: ARMOUR Residential (ARR)

Interest rates are poised to stay low for possibly the next few years. The global economy appears fragile at best and central bankers around the world are trying to stimulate economic activity by lowering interest rates. This means investors need to consider what types of returns they will be comfortable with, whether it is staying "safe" in a money market account that yields less than half a percent, or taking the risk of owning a popular dividend stock such as Bristol-Myers Squibb Company (NYSE:BMY) which yields about 4%, Pfizer Inc. (NYSE:PFE) at 3.7%, or perhaps Chevron Corporation (NYSE:CVX) which yields about 3.2%. These are all solid picks, but those stocks trade at or near 52-week highs, and that has pushed the yields down to lower levels. Investors who want to earn more should consider stocks in the mortgage real estate investment trust sector. Here is a closer look at one stock in this sector that yields about 16%:

ARMOUR Residential REIT, Inc. (NYSE:ARR) is set up as a real estate investment trust (REIT). It is focused on investing in adjustable rate and fixed rate residential mortgage-backed securities that are either issued by or guaranteed by U.S. Government agencies or U.S. Government sponsored entities. These agencies and entities include: Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation, (Freddie Mac), and Government National Mortgage Administration, (Ginnie Mae). Since many of the assets that Armour invests in are guaranteed by government agencies or entities, the risks of default are lower.

As a real estate investment trust, Armour is legally required to pay the majority of its earnings out to shareholders in the form of a dividend. That is one reason why this company offers a yield that is much higher than average. The other reason it pays so much is because it uses leverage. By borrowing money at low rates and re-investing it in mortgage assets that provide higher returns, Armour is able to greatly increase returns for shareholders. This business model is what has made the mortgage REIT sector so appealing for many income investors. Here are a couple more reasons why Armour shares are worth considering:

1) Armour pays a dividend on a monthly basis, usually going ex-dividend around the 12th or 13th day of the month. This is unique since most dividend stocks pay on a quarterly basis. For many income investors, the monthly frequency is a big plus, especially when the yield is around a whopping 16%. The current monthly dividend rate is 10 cents per share.

2) Not long ago, Cramer gave a buy rating to a lightning round caller for Armour Residential shares. Jim Cramer is so widely followed that his backing can keep strong support under a stock, especially one with a high dividend. Two other stocks in the mortgage REIT sector that Cramer has rated as a buy is Annaly Capital Management, Inc. (NYSE:NLY), and American Capital Agency Corp. (NASDAQ:AGNC). Cramer's backing of these stocks is an indication that this sector could be one of the best ways to generate outsized yields.

With a yield that is nearly quadruple the size of what is offered by popular dividend stocks like Bristol-Myers, Pfizer, Chevron, and many others, buying Armour shares on dips could be a great way to boost the income portfolio, and do so on a monthly basis.

Here are some key points for ARR:

  • Current share price: $7.45
  • The 52 week range is $5.40 to $7.98
  • Earnings estimates for 2012: $1.21 per share
  • Earnings estimates for 2013: $1.13 per share
  • Annual dividend: $1.20 per share, which yields about 16%

Data is sourced from Yahoo Finance.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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.