Why The Correction In High-Yielding Mortgage REIT Stocks Is Worth Buying

by: Hawkinvest

Like many dividend stocks, the mortgage REIT's have been rallying and several stocks in the sector were recently hitting new 52-week highs. Mortgage REIT stocks appear to have been getting a little ahead of themselves with those highs, so it did not take much to take some of the air out. The catalyst that appears to have caused the latest setback for this industry is the Federal Reserve's announcement of Quantitative Easing 3 or QE 3. This program steps up the bond buying plans which lowers rates for mortgage borrowers. Lower interest rates work to reduce returns for banks and mortgage REIT companies because existing mortgage borrowers suddenly have new incentives to refinance at lower rates. This reduces net interest margins and profits. Since mortgage REIT companies pay the majority of earnings out in the form of a dividend, a reduction in profits can quickly lead to dividend cuts, and that usually leads to a lower share price.

A few analysts have recently turned less bullish on the mortgage REIT sector for this reason and some companies have also recently cut the dividend, or are expected to in the near future. However, for the past couple of years, buying the pullbacks in this sector due to dividend cuts or secondary stock offerings has paid off handsomely. That's because shareholders who buy the dips are still collecting relatively huge yields that really add up over time.

Some of the stocks in this sector yield 12 to 15% or more, so an investor with a 3 year (for example) time horizon could be looking at returns of around 40%. Compare that to an investor who owns a stock like Exxon Mobil (NYSE:XOM) which now yields just 2.5%. That type of yield will return just about 7.5% over the same 3 year time frame. That's why mortgage REIT investors can afford the occasional pullback and why those declines make sense to buy. The low interest rate environment is poised to last, possibly for years, as global demand remains weak. Investors who position themselves to receive major dividends in this sector could be collecting returns of about 40%, especially if employing a buy on the dips strategy. Here are some mortgage REIT stocks that have pulled back significantly in recent trading and now appear to offer investors another solid buying opportunity:

iShares FTSE NAREIT Mortgage REIT (BATS:REM) recently traded as high as $15.65 per share, but the recent pullback in the sector has taken it down to $14.20 per share. I think this is the best way for more conservative investors to capture the high yields this sector offers because it offers diversification. This investment is an exchange trade fund that invests in a variety mortgage real estate investment trusts. Top holdings include stocks like Annaly Capital (NYSE:NLY) which represents about 22% of this funds assets, American Capital Agency (NASDAQ:AGNC), which represents almost 17% of fund assets, as well as much smaller positions that amount to less than 5% of fund assets in names like: Two Harbors Investment Corp (NYSE:TWO), Chimera Investment (NYSE:CIM), MFA Financial (NYSE:MFA) and others.

Here are some key points for REM:

  • Current share price: $14.20

  • The 52 week range is $12.15 to $15.65

  • Earnings estimates for 2012: n/a

  • Earnings estimates for 2013: n/a

  • Annual dividend: about $1.60 per share which yields around 12%

American Capital Agency shares were trading at 52-week highs in early October, but the shares have been slammed in recent days in a mini "flash crash" which took the shares down to just $29.63 intraday. However, the stock recovered some of those losses as investors realized the sell-off might have been exaggerated. This company offers one of the highest yields in the sector and it has even earned a buy rating from Jim Cramer, who believes the stock still makes sense even in spite of the challenges facing the industry. The recent dip and any future pullbacks appear to be ideal buying opportunities for income investors.

Here are some key points for AGNC:

  • Current share price: $32

  • 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 15.3%

Annaly Capital Management, Inc. shares were also recently slammed due to investor concerns over the potential for reduced earnings and dividend cuts. However, these fears have roiled the sector before and tend to be more bark than bite. Investors who have sold in fear and on panic days have generally only hurt themselves because over the long term, this stock and the mortgage REIT sector has historically been providing superb returns. Annaly went public in 1997, and since that time the shares have generated returns of over 600%. That is a track record that few investments can beat, and it serves to remind investors that when it comes to investing, reacting to short-term and exaggerated selling might not make sense unless you are taking advantage by buying the dips. Jim Cramer has also given Annaly shares a buy rating and that is one more reason to consider this high-yielding stock.

Here are some key points for NLY:

  • Current share price: $15.57

  • 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 12.5%

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.