Reap Double-Digit Dividends in Real Estate the Easy Way

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some real-estate stocks to your portfolio, the iShares FTSE NAREIT Mortgage Plus Capped Index Fund ETF (NYSEMKT: REM  ) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The iShares ETF's expense ratio -- its annual fee -- is a relatively low 0.48%. It also sports a whopping dividend yield above 11%.

This ETF has performed well, beating the world market over the past three and five years. 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 real estate?
Perhaps because there's a finite amount of it, real estate tends to increase in value over time, though not always in a straight line. Real estate investment trusts (REITs), meanwhile, offer an extra benefit, via their requirement to pay out at least 90% of their income in the form of dividends. Mortgage REITs, such as those below, have some tailwinds, such as falling prepayments, but also some red flags.

More than a handful of real-estate companies had strong performances over the past year. Northstar Realty Finance (NYSE: NRF  ) surged 92%, for example, and yields 8%. It has increased its payout by about 80% over the past six quarters. Its revenue has been growing at a double-digit clip over the past few years, and offers the benefit of being diversified between real-estate debt, mortgage-backed securities, and the old-fashioned leasing of owned properties.

American Capital Agency (NASDAQ: AGNC  ) gained 23%, and yields a huge 15.8%. There are concerns that the dividend may get reduced (again), but even a halving would leave a hefty payout. In the meantime, the company recently benefited from an increased interest rate spread that was higher than some high-profile peers, and it has boosted the proportion of its portfolio that isn't likely to suffer from borrowers refinancing and prepaying mortgages. Its CEO has been buying shares, too. Look at its big picture, though, as there are some aspects of the company that aren't too appealing.

Chimera Investment (NYSE: CIM  ) advanced 21%, yielding 11.8%. It has made money by taking on more risk than many of its brethren. My colleague John Maxfield has expressed doubts about the company, and it has not filed required reports on time, either, which is a concern. But he also notes that some major investors have been upping their stakes in Chimera.

ARMOUR Residential REIT (NYSE: ARR  ) rose 11%, and yields 14.4%. It has been an agency-backed real-estate investor, but recently changed its charter to broaden its scope. This may lead to greater profits down the road.

The big picture
Demand for real estate isn't going away anytime soon. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

It's hard to miss the massive double-digit dividend on Chimera Investment, but when investors start to dig in, it's also hard to miss the fact that it's been more than a year since the company has filed audited financials with the SEC. Should you follow the dividend's siren song into Chimera's stock? To help you figure out whether the stock is a buy right now, The Motley Fool has just released a new premium research report on Chimera. Click here now to claim your copy of this must-have investor's resource.


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  • Report this Comment On March 09, 2013, at 9:49 AM, lepinluee wrote:

    What part of AGNC is not appealing? Will that be coming in part 2? Seems to be the best managed company in MBReits.

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