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Silver Lining to a Falling Dollar
Despite the U.S. national debt, there is a silver lining for income
investors. This massive spending, combined with movement out of U.S.
Treasuries, is going to take its toll on the dollar, and
international income investors could reap the rewards in the form of
higher dividends. |
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| Earn
Double-Digit Yields with Mortgage REITs |
Published: December 6, 2005
With all the bad press they've
been getting lately, you'd think "REIT" was a four-letter
word. Since August, the NAREIT Index of all real estate investment
trusts has fallen almost -6%. Mortgage trusts, a special breed of REITs
that invest in loans backed by real estate, have done even worse.
Mortgage REIT stocks are down a miserable -20% so far this year,
according to the National Association of Real Estate Investment Trusts.
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What's the problem?
Mortgage trusts thrive on cheap sources of capital, but when those
sources dry up, profits shrink. No two trusts are exactly the same, but
they all make money by borrowing at lower rates and reinvesting those
funds at higher rates.
When short-term interest rates (two years or less) were much lower than
longer-term rates (ten years or more), mortgage REITs could make easy
money. All they had to do was borrow at lower short-term rates and
reinvest the funds in long-term securities that delivered higher yields.
But that strategy hasn't worked too well this year, as short-term interest
rates have moved higher but longer-term rates have remained fairly flat.
Just 18 months ago, the gap between short-term and long-term rates (the
difference between 2-year and 10-year Treasury notes) was more than 1.8%
-- enough to turn a decent profit. Now that gap has narrowed to a
five-year low of 0.8%.
Profits have been squeezed by this shrinking spread, and since mortgage
REITs hand over most of their profits to shareholders, dividends have
been slashed as well. Not surprisingly, shares of mortgage REITs have
tumbled as a result. For example, industry leader Annaly Mortgage (NLY)
cut its dividend in October for the third time in less than a year. The
cut sent investors fleeing for the exit doors, driving the shares down
-34% in a week.
Annaly is not alone. Of some 37 publicly traded mortgage REITs, at least
seven have slashed their dividends an average of -25% in the past few
months and have warned of additional cuts to come.
So why am I touting mortgage REITs?
No mortgage REIT is immune from the impact of rising interest rates.
With this in mind, investor fears of further dividend cuts from these
stocks have brought the entire sector to its knees.
This is precisely why I'm recommending a few select stocks in this
sector. I believe the sell-off has now created an excellent entry point
for a handful of quality mortgage REITs. Although the overall sector has
been hit hard, a handful of select mortgage REITs have survived and even
thrived while rates were rising, and many of these stocks are now
trading at bargain prices.
While other trusts were cutting their dividends, these firms were
actually boosting theirs. The sharp drop in their share prices, coupled
with the steep rise in their dividend payouts, has sent their yields to
record territory.
But maybe not for long. With the Fed likely nearing the end of its rate
hike campaign, interest rates are leveling off and investors are
starting to show renewed interest in mortgage REITs. Going forward, I
expect the group to benefit from cheaper borrowing costs and steady
profits.
As mortgage REITs continue to rebound, those firms that outperformed in
the face of rising rates, like the ones featured below, should lead the
charge.
Mortgage REITs bottomed in October and are starting to rally.
Here's a closer look at three of my favorite mortgage REITs . . .
Important
Note: Throughout the remainder of this article, editor Carla Pasternak provides
a comprehensive table of all 37 domestic mortgage REITs, as well as an in-depth analysis of
her three favorite stocks from this list. However, in order to view the
remainder of this article, you'll need to subscribe to our premium
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