Recent Performance Review Of 7 High-Yield Mortgage REITs

by: Zvi Bar

Mortgage-backed securities caused a major financial crisis three years ago. The low-rate environment that followed the bursting of the Internet bubble, combined with lax mortgage practices by a historically strict group, fueled the ballistic rise of MBSs. The collapse of MBSs and the many synthetic investments derived from them brought down almost everything else, including interest rates. Now, the companies that hold these securitized mortgages occupy the highest yielding corner of the U.S. equity markets.

There are many REITs that manage portfolios of these securitized mortgages. These mREITs have recently been hit by a series of fears beyond the concern that foreclosures will continue for the coming years and that housing prices may continue to drop.

Mortgage REIT risk has been fortified by the growing fear of regulatory changes and the looming risks associated with interest rates rising. The new regulatory risks include some involving tax status and leverage use.

The following is a list of seven of the highest-yielding mREITs that have reasonably large trading volumes. I have provided their yields as well as their 5-day (1-week), 1-month, 6-month and 2011-to-date performance rates:

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Many of these mREITs are expected to announce dividends within the next two weeks, but it is likely that this coming week will include at least some dividend announcements. Last year, Annaly, the largest publicly traded mREIT, announced its dividend on December 15, 2010, and American Capital Agency announced on December 17.

These mREITs offer significant yield and some real and understandable property-related risks. Exposure to mREITs should be limited to a reasonable percentage of a portfolio. Additionally, most REIT dividends are taxed as regular income, and not at the lower corporate dividend rate.

Disclosure: I am long NLY, CIM.

Disclaimer: This article is intended to be informative and should not be construed as personalized advice as it does not take into account your specific situation or objectives.

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