Why These Passive Income Dividend Stock Machines Soared Tuesday

The stock market had a mixed performance on Tuesday, trading higher for parts of the day but finishing with new closing lows for the year for the S&P 500 (^GSPC -0.58%) and Nasdaq Composite (^IXIC -1.15%). The Dow Jones Industrial Average (^DJI -0.12%) managed to hold onto some modest gains, but they were quite a bit smaller than they'd been earlier in the afternoon. High-growth tech stocks once again found themselves in the crosshairs of bearish investors on Tuesday, extending losses from earlier in the year amid ongoing concerns about inflation.

Data source: Yahoo! Finance.

Yet there was some relief in the stock market among dividend investors, as one niche industry showed extremely strong gains on Tuesday. Mortgage real estate investment trusts (REITs) are a small part of the broader real estate investing universe, but they're among the most sensitive to rate movements. That means they've taken big hits so far this year, but positive news from one of the biggest mortgage REITs led to a big bounce in stocks across the sector.

Not-so-bad news from Annaly

The high-profile mortgage REIT responsible for the optimism in the industry was Annaly Capital Management (NLY 0.96%). The company's stock jumped 12%, clawing back a portion of the ground that it has lost in recent months.

Annaly updated shareholders in a news release early Tuesday morning, choosing to give advance notice of key business metrics from the third quarter prior to its expected full earnings report release later in the month. The news wasn't entirely good, but it wasn't as bad as some investors had apparently believed.

Annaly said that its book value has indeed taken a hit in the adverse market environment, falling from $23.59 per share at the end of June to between $19.85 and $20.05 per share as of Sept. 30. However, with the stock having closed just above $15 per share on Monday, investors believed that the roughly 25% discount to book value was a bit too wide even in current conditions.

Annaly also emphasized its financial strength. The mortgage REIT has seen its leverage levels rise slightly, but it reported significant liquidity, with $6 billion in unencumbered assets at the end of the quarter. Best of all for dividend investors, Annaly said that its earnings available for distribution exceeded its planned $0.88 per share dividend payout, giving some reassurance about its ongoing ability to sustain the quarterly payment even with a current yield above 23%.

AGNC weighs in

Mortgage REIT peer AGNC (AGNC 0.89%) climbed 11% after making its own preliminary report late Monday. The news was largely the same, with book value falling sharply from June levels but resting above where the stock had traded before the announcement.

Moreover, AGNC said it would continue to pay its $0.12 per share monthly dividend. That implies a yield of more than 18% at recent stock prices.

Big gains across the mortgage REIT space

Investors in other mortgage REITs shared in the gains. MFA Financial (MFA 0.20%) led the industry with a 13% jump, while Armour Residential (ARR 0.86%) also made a 12% move higher. Other companies like Invesco Mortgage Capital (IVR 0.37%) and New York Mortgage Trust (NYMT 1.34%) managed to post sizable gains as well.

It's far from certain whether Annaly, AGNC, and their peers have seen the worst of the current economic environment just yet. With concerns about the future path of interest rates and disruptions related to the Federal Reserve's exit from intervention in the mortgage-backed securities market, mortgage REITs could see further volatility well into the future. For now, though, investors are just happy to see a bounce from declines that had taken shares of Annaly and AGNC down more than 50% just since the beginning of the year.