Wednesday October 19, 2011
by Steve Christ, editor Wealth Daily
Talking up real estate investments may be a hard sell. But by investing in what's known as an Agency mortgage REIT, investors actually end up with very little default risk. For that, you can thank your Uncle Sam.
Agency mortgage REITs invest virtually all of their assets in securities backed by Government Sponsored Enterprises.
Known commonly as GSEs, these Fannie Mae, Freddie Mac, and Ginnie Mae loans actually carry no credit risk at all since they all have the implied backing of the federal government.
That's one of the big reasons Agency mortgage REITs have been among the few stocks in the financial sector to not only survive but prosper during the ongoing credit crisis. It's all about the backstop.
That leaves interest rate risk as the biggest downside for these companies; rapidly rising rates and or a flattening of the yield curve would work to depress the returns these companies can earn on the spread.
However, with Ben Bernanke's commitment to keep borrowing costs at rock bottom into 2013, those fears appear to be overdone.
As for the Fed's “Operation Twist,” it's hard to see how the long end of the curve can fall much further from here.
Given the relatively stable environment between rates and prepayments, that makes the risk/reward profile for these stocks attractive when you consider their eye-popping dividends.
In fact, the dividend streams are so large these days that these stocks practically hedge themselves.
That said, my two favorites in the group offer the juicy yields and are at or very near book value:
1. Annaly Capital Management (NLY) is an Agency REIT; it currently trades at a 0.97 times book value while paying investors a 15.50% yield.
Over the last ten years, Annaly has returned 320% to investors while the broader markets have been stuck in the ditch. Longer term, the results are even more impressive:
2. American Capital Agency Corp. (AGNC) is another topflight Agency REIT. It trades at 1.01 times book while paying investors a 21% yield. A newer entrant to the sector, ANGC has returned 32% annualized to its investors since July 2009:
For yield-hungry investors, those are two companies that are pretty hard to beat.
Learn more about this financial newsletter at Steve Christ's Wealth Daily.