Dividends – A Dividend I’m Buying Now

| September 28, 2009 | 0 Comments

I’m always getting questions from readers asking what I’m buying.  It seems everyone wants to know what I’ve bought, what I’m looking at, and how I do my research.

Well, today I’m going to answer a few of those questions.

I’m going to tell you exactly what I’m buying this week.  But first, let me walk you through some of my research on the subject.

Last week the Federal Reserve had its monthly monetary policy meeting. They discuss stuff like interest rates, the liquidity they’re injecting into the economy, and even inflation.  After the meeting, they put out a statement announcing their thoughts on the economy.

Last week’s meeting didn’t produce anything new.

The Fed’s announcement wasn’t very interesting to me, except for one small part.  Mortgage-backed security purchases.  It sounds complex, but here’s what you need to know.

After the lending market for real estate froze up, the Fed stepped in and started buying mortgage-backed securities.  A mortgage-backed security, or MBS, is an asset-backed security which gets cash flows from mortgage loans, typically on residential property.

So if you’ve bought a house in the last year or so, there’s a good chance the Fed owns your mortgage.

Right now they account for 80% of all mortgage-backed security purchases.  You can see why it’s important to know what they’re going to do.

That’s why I read with interest the Fed would be slowly limiting their purchases of mortgage-backed securities.  It’s going to have a huge impact on mortgage interest rates.  As the Fed slows down purchasing, we’ll see mortgage interest rates rise.

That’s when I started wondering, “Who’s going to benefit from rising mortgage interest rates?”

I think REITs buying mortgage-backed securities will see a jump in profits.  You see, their business is simple.  They borrow money very cheaply and use the proceeds to buy mortgage-backed securities, which pay a higher interest rate.

The Mortgage REIT gets to keep the spread.  So, if they borrow at 1% and buy an MBS paying 5%, they keep the difference… in this case 4%.

Now I know it doesn’t sound like a lot.  However, the Mortgage REITs can do this simple transaction over and over again.  Some portfolios are in the billions and tens of billions of dollars!  As mortgage rates rise, they stand to make even more money!

Let’s take a closer look at these Mortgage REITs.

There are a number of them to choose from.  You could just buy them all, but most people don’t have that much money.  So let’s take a closer look and try to find the best one.

The first company I’m looking at is Anworth Mortgage (ANH).  They have a market cap over $850 million and are paying a dividend of 16%.  That’s a sweet yield.  Let’s dig a little deeper.  They have a payout ratio of 136%.  That’s a big red flag.

If you don’t know, the payout ratio is how much of a company’s earnings are being paid out in dividends.  In the case of Anworth, they are paying out more in dividends than they’re bringing in.  I’m thinking this dividend might get cut.

Let’s look at a few others.

Capstead Mortgage (CMO) has a $960 million market cap.  They’re paying a huge dividend too… 14%.  Looking at the payout ratio, I see another red flag.  Their ratio is 104%… still too rich for my blood.

The next company is Hatteras Financial (HTS).  Their market cap is over $1.1 billion and they’re paying a 14% dividend.  Their payout ratio is 95% – it’s still high, but better than the other two.  Let’s take a closer look.

Here’s another red flag… nobody’s buying the stock.  With prices as low as they are, you’d think management would be jumping in with both feet.  Not at this company… management ownership is abysmal.

Then I started looking at MFA Financial (MFA).  MFA’s been on a nice uptrend over the last few months and they’re trading right around $8 a share.  They have a $1.8 billion market cap and are paying a huge 12% dividend yield.  Their payout ratio is 83%.  It’s not the greatest, but it’s not bad either.

Looking at insider holdings, I get a warm and fuzzy feeling.  Back in May, management started buying the stock on the open market.  They weren’t just exercising options, they were using their own money to buy the stock.  Talk about a huge vote of confidence.

I did some more research, looked at their SEC filings, and reviewed old press releases.  I liked what I read.

I think MFA has a bright future ahead of it, and I’m planning on adding them to my portfolio this week.  Take a look for yourself.  You’ll see what I saw.  Don’t wait too long on this stock… its set to rally soon.

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Category: Dividend Stocks

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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