Mortgage Finance Companies Will Rebound With the Housing Industry

Does a 6.2% dividend yield interest you? Mortgage finance companies like MGIC Investment Corporation, New York Community Bancorp, People's United Financials, and First American Corporation may be worth a closer look.

Apr 28, 2014 at 5:15PM

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some mortgage finance companies to your portfolio but don't have the time or expertise to hand-pick a few, the SPDR S&P Mortgage Finance ETF (NYSEMKT:KME) could save you a lot of trouble. Instead of trying to figure out which stocks will perform best, you can use this ETF to invest in lots of mortgage finance companies simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. This ETF, focused on mortgage finance companies, sports a relatively low expense ratio -- an annual fee -- of 0.35%. The fund is very small, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.

This mortgage-finance-companies ETF has outperformed the world market over the past three years and is lagging slightly year to date. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

Why mortgage finance companies?
The housing market is finally turning around -- slowly -- and mortgage finance companies will be among the beneficiaries. This SPDR S&P Mortgage Finance ETF contains a range of financial companies related to mortgages, including lenders, mortgage insurers, and more.

More than a handful of mortgage finance companies had strong performances over the past year. MGIC Investment Corporation (NYSE:MTG), a mortgage insurer, surged 57%. It recently posted surprisingly strong first-quarter results, in part due to a drop in defaults and despite 20% lower sales volume. Earnings returned to profitability (and to a level not seen since 2007) and blew past estimates by 67%. This is the third quarter in a row featuring estimate-surpassing results. MGIC's percentage of delinquent loans fell to about 8% in the last quarter from about 9% in the previous one -- and nearly 13% a year ago.

New York Community Bancorp (NYSE:NYCB) gained 27% and yields a hefty 6.2% -- though its steep payout ratio suggests big dividend hikes aren't around the corner. Its growth has far outpaced that of its peers, and much of its success owes to the fact that it rarely writes bad loans. Its cost of funds, though, is higher than those of many other banks, in part because it relies significantly on debt and also has relatively few noninterest-bearing deposits, thus paying more in interest than many peers.

People's United Financial (NASDAQ:PBCT) advanced 15% and yields 4.5%. Bulls like its fat dividend, its low-cost deposits, and its falling share count -- recently down 8%. Critics, though, see falling net interest margins and the bank's need to cut costs. People's United Financial's last quarter featured earnings that fell short of expectations, though management pointed out annualized loan growth of 4% and organic deposit growth of 10%, along with a drop in the percentage of nonperforming loans from 1.25% last year to 0.84% this past quarter.

The big picture
If you're interested in adding some mortgage finance companies to your portfolio, consider doing so via an ETF. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make profiting from it that much easier.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Selena Maranjian has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information