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This article is part of our Rising Stars Portfolios series.
For a company, it's gotta be hard to do well when other companies are faltering. But that's exactly what the players in the high-yielding mortgage REIT sector do: kick butt when other companies feel the hurt. And there's more good news for these mREITs -- unemployment is up.
Late last week, it was reported that unemployment climbed to 9.2%. The number of net new jobs came to just 18,000 for the month, well below even the most dour analyst predictions. It was the weakest hiring report since May 2010. The poor showing throws into doubt analysts' claims about a second-half recovery, but it's nevertheless good news for mortgage REITs, which thrive in tough conditions like these. With unemployment so high, the Federal Reserve cannot credibly raise interest rates, keeping the cost of funding low for these REITs.
Such conditions are allowing Annaly Capital (NYSE: NLY ) and Chimera Investment (NYSE: CIM ) to pay out huge yields, around 14%. And that's part of the reason I purchased Annaly in my Special Situations portfolio, as a hedge against some other consumer names I own.
This segment of the market has seen more than its fair share of IPOs this year. New entrants are looking to raise more than $2 billion in capital to invest in mortgage REITs -- the market's hottest dividend sector. But already-public players have been taking their hats in hand to investors this year, too. Annaly, American Capital Agency (Nasdaq: AGNC ) , and Invesco Mortgage Capital (NYSE: IVR ) have performed secondary offerings recently. And that's on top of billions in new shares issued by American Capital Agency, Hatteras Financial (NYSE: HTS ) , Annaly, and Chimera over the past few years.
These dividends look quite tempting:
|American Capital Agency||662%||18.5%|
|Two Harbors Investment (NYSE: TWO )||382%||14.6%|
|Cypress Sharpridge (NYSE: CYS )||554%||18.3%|
Source: Capital IQ, a division of Standard & Poor's.
As I explained in a previous article: "Mortgage REITs make their money by borrowing at short-term rates and buying long-dated mortgages, and pocketing the spread between the two. They then lever up their balance sheet in order to exploit that spread. … Those yields trounce most of what you can find in traditional REITs."
And besides the unemployment report, other economic indicators or political obstacles continue to make mortgage REITs look attractive. The budget impasse will ensure that any government stimulus will be modest, and any attempt at near-term fiscal austerity will hurt the economy, making the situation relatively more attractive for mortgage REITs. Moreover, with plenty of excess capacity, businesses are loath to invest.
So while the bad news keeps on coming for the broader economy, it's almost all good news for mortgage REITs. And that's why I've decided to add even more Annaly to my own portfolio, as I explain here.
This article is part of our Rising Stars Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of our Rising Star analysts (and their portfolios).