High-Yielding Mortgage REIT Stocks Could Outperform Into 2013

Includes: AGNC, CIM, NLY, XOM
by: Hawkinvest

Investors have been starved for ways to generate income from their investments. Thanks to Federal Reserve policies that have pushed interest rates down to record low levels, cash in money market accounts and certificates of deposits make next to nothing. One popular solution has been investing in dividend stocks since many companies offer yields that can easily beat traditional savings and money market accounts. High demand for yield has pushed many dividend stocks to trade at or near 52-week highs.

However, the dividend stock party could be coming to an end because some dividend stocks are trading at stretched valuations, but also because tax rates could be poised to surge under Obama's 2013 budget and Obamacare plan, from 15% to as high as 44.8%. For many investors this potential tax hike will make dividend income less attractive as the net returns could drop significantly.

However, high-yielding mortgage real estate investment trusts could be poised to continue to generate mouth-watering yields and not suffer from the potential tax hikes facing most dividend stocks. That is because dividend income from mortgage REIT stocks is already taxed at ordinary income rates, and that means this sector is not likely to be impacted the way many dividend stocks might be. The other reason mortgage REIT stocks could continue to outperform most other stocks is because of the tremendous yields they offer. Consider that popular dividend stocks like Exxon (NYSE:XOM) now only yield about 2.5% and compare that to yields offered by the mREIT sector and it's easy to see why this group of stocks makes so much sense for income investors. Based on current yields, Exxon might only generate about 12.5% returns from the dividend over the next 5 years. However, a mREIT stock that yields 14%, could be poised to generate returns of about 70% in the same time period. That's why it's worth considering some of the high-yielding mREIT stocks listed below:

Annaly Capital Management, Inc. (NYSE:NLY) is a popular mortgage REIT stock for many income investors. It is one of the few stocks in this sector that has even earned the backing of Jim Cramer who has said "Go buy Annaly. It has a great yield and it's better run." Annaly Capital has provided shareholders with very strong returns since it went public in 1997. Investors who have bought and held since the IPO have seen total returns of over 600%, and that is a solid trend that could be poised to continue in the coming years.

Here are some key points for NLY:

  • Current share price: $16.54
  • The 52 week range is $15.52 to $17.75
  • Earnings estimates for 2012: $1.80 per share
  • Earnings estimates for 2013: $1.88 per share
  • Annual dividend: $2 per share which yields 12.1%

Chimera Investment Corporation (NYSE:CIM) manages and invests in residential mortgage-backed securities, residential mortgage loans and other securities. Chimera is managed by a subsidiary of Annaly Capital, and it offers a slightly higher yield. Chimera shares have seen a strong rally since August, but it could have further long-term upside since it still trades well below book value which is $3.27 per share. However, patient investors should consider waiting for a short-term pullback in order to maximize returns.

Here are some key points for CIM:

  • Current share price: $2.71
  • The 52 week range is $1.81 to $3.16
  • Earnings estimates for 2012: 47 cents per share
  • Earnings estimates for 2013: 45 cents per share
  • Annual dividend: 36 cents per share which yields 13.2%

American Capital Agency (NASDAQ:AGNC) is also a leading mortgage REIT company that invests in commercial and residential mortgage loans. Like most companies in this sector, it uses leverage and the special status as a REIT to provide shareholders with yields that are way above average. It invests in many assets which are guaranteed by U.S. Government agencies, like the Government National Mortgage Association, or a U.S. Government-sponsored entity, such as the Federal National Mortgage Association. Investing in government guaranteed securities is one way this company manages risk for shareholders while still providing very strong returns through dividends. As one of the top-yielding REIT's in the sector, this stock appears particularly attractive to buy on pullbacks.

Here are some key points for AGNC:

  • Current share price: $34.57
  • The 52 week range is $26.86 to $36.77
  • Earnings estimates for 2012: $4.02
  • Earnings estimates for 2013: $5.47
  • Annual dividend: $5 per share which yields about 14.3%

Data is sourced from Yahoo Finance. 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. 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.