A Timely Strategy For Boosting Your Portfolio’s Yield
Short-term interest rates are stuck near zero for the foreseeable future. Ben Bernanke said as much when he announced a third round of quantitative easing in September.
In his September speech, the Fed Chairman said the fed funds rate would stay between 0% and 0.25% at least through 2015. This is bad news for income investors.
The fed funds rate is what short-term investment yields are based on. As such, it’s going to be extremely difficult to safely generate meaningful investment income for another two-and-a-half years at minimum.
Treasuries, Certificates of Deposit, money market funds… they’re all yielding next to nothing. Heck, to get a measly 2% in a CD these days, you have to lock up your money for five years!
Back in 2007 (before the financial crisis), you could earn over 5.5% on a five-year CD.
It’s enough to make any income investor pull their hair out!
If you’re one of the millions of investors who need to generate investment income, keep reading. I’m going to tell you about an opportunity right now that can get you yields of 10% or more every year.
The investment vehicle I’m talking about is none other than the mortgage real estate investment trust, or as they’re commonly referred to… the mortgage REIT.
According to Investopedia…
A real estate investment trust or REIT is “a security that trades like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages.”
“REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate.”
“Mortgage REITs deal in investment and ownership of property mortgages. These REITs loan money for mortgages to owners of real estate, or purchase existing mortgages or mortgage-backed securities. Their revenues are generated primarily by the interest that they earn on the mortgage loans.”
Here’s the key…
In the current low interest rate environment, mortgage REITs are a better risk reward play than straight REITs.
You see, mortgage REITs borrow capital at these extremely low rates. Then, they invest it into higher yielding real estate portfolios. What’s more, they also often use leverage to make money off the spread between these rates.
And all the while, they pay out high yields to investors on a regular basis.
The best part is… you have an opportunity right now to lock in yields last seen in August.
Mortgage REITs have dropped in value since the Fed announced QE3 in mid-September. Some lost more than 20% from their peaks to their troughs in mid-November.
As a result, the yields on many mortgage REITs have skyrocketed.
MFA Financial (MFA) is now paying investors an annual yield of 10.3%. Annaly Capital Management (NLY) has seen its yield increase to 13.5%. And American Capital Agency Corp. (AGNC) sports a hefty yield of 16.1%.
Investors sent mortgage REITs plunging on fears that QE3 would hurt their returns going forward.
They’re concerned the Fed’s heavy buying of mortgage-backed securities will create a surge in mortgage refinancings. This would be bad for mortgage REITs because higher than expected principal paydowns would make it difficult for them to continue generating high enough yields to support their current dividend rates.
In other words, some investors are worried that QE3 will drive down mortgage REIT dividend yields in the months ahead.
But I don’t think this scenario is very likely in the near-term. The plain truth of the matter is that the industry is in no position to increase refinancings that much right now.
Therefore, the recent drop in mortgage REIT security prices offers a terrific buying opportunity for income investors. Take a closer look at any of the three mortgage REITs mentioned above.
And if you’re nervous about putting all your eggs in just one mortgage REIT basket, you should take a look at a quality, mortgage REIT ETF. One that I like is iShares FTSE NAREIT Mortgage Plus Capped Index Fund (REM).
The fund is large with nearly $1 billion in net assets. It’s a well-diversified portfolio with holdings of 30 different mortgage REITs. It charges a reasonably low expense ratio of 0.48%. And it’s currently offering a robust dividend yield of 11.55%.
Profitably Yours,
Robert Morris
Category: Real Estate, Stocks
