Dividend investing can be a safe haven in an economic storm, and investors are increasingly turning to dividend stocks as yields become tougher to find. One area that has seen particular interest from investors is the mortgage REIT sector, because of the massive yields on offer.
Typically, mortgage REITs borrow short-term funds and buy long-dated mortgage-backed securities. The companies then pocket the interest-rate spread. Some companies invest in safer, less lucrative government-backed securities, while others invest in more risky offerings in exchange for a greater spread. In whatever case, the huge dividend yields you see below are the result of using leverage to boost returns.
What are the risks of the mortgage REIT space? These players are subject to interest-rate risks, of course, but their high leverage exacerbates -- for good or ill -- any move in interest rates. So leverage and interest rates are good things to keep an eye on in this space. In particular, pay attention to a company's interest-rate spread, which is reported in its quarterly filings.
Investors should fully understand the risks involved in buying mortgage REITs. Such high yields suggest that the good times won't continue for too long and are usually a bad sign for a stock. High yields often mean that investors have lost confidence in the company, pushing its stock prices down and raising its yield. But by law, these REITs have to pay out most of their earnings as dividends, so it's normal for their earnings to be higher than usual. Nevertheless, these yields suggest that the market is pricing in bad times ahead for the sector.
I ran a screen for the highest-yielding mortgage REITs with a market cap above $200 million. Here are the results.
ARMOUR Residential REIT
American Capital Agency
Invesco Mortgage Capital
Two Harbors Investment
Anworth Mortgage Asset
Annaly Capital Management
Source: Capital IQ, a division of Standard & Poor's.
Annaly and Chimera are two of the better-known names in the sector, so they make a good place to begin your search into this arena. But remember, these tempting yields could be ticking time bombs, so examine them closely. And be sure to diversify your picks across sectors and do not concentrate in just one sector, so that you can diversify your risk. There are plenty of high-yield stocks out there.
For a basket of some high-yield dividend opportunities, get The Motley Fool's five-page free report, "13 High-Yielding Stocks to Buy Today."
Jim Royal, Ph.D., owns shares of Annaly. The Motley Fool owns shares of Annaly and Chimera. Try any of our Foolish newsletter services free for 30 days. 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.