Over the past year, a number of the highest-yielding dividend stocks on the S&P 500 (SNPINDEX:^GSPC) have taken massive hits to their share prices.
Slaughter in the mortgage REIT market
Since last October, shares of CYS Investments are down by 36%, ARMOUR Residential by 38%, and American Capital Mortgage Investment by 18%.
That the inflection point occurred in May isn't a coincidence. The catalyst for the decline was a hint by the Federal Reserve after its May meeting that it could soon begin to reduce its support for the economy via its monthly purchases of agency mortgage-backed securities and Treasury bonds.
On the heels of that announcement, long-term interest rates skyrocketed. Among others, the rate on the 30-year fixed rate mortgage leapt by roughly 100 basis points. And because interest rates and the value of fixed-income securities are inversely correlated, this sent the latter plummeting.
You can see the impact of these trends on the book value per share at each of these companies. Since the end of last year, the metric has fallen by 24% at CYS Investments, 25% at ARMOUR Residential, and 12% at American Capital Mortgage Investment -- though the latter's figures are current through only June 30.
Does this present a buying opportunity?
The point is that the share-price decline has outpaced the drop in book value per share. Does this present a buying opportunity?
It's tempting at this point to say "yes." Because of the different rates of the decline in these two metrics, all three companies currently trade below book value. But here's the catch: The discount is in anticipation of further book value deterioration, which is bound to come as interest rates rise further.
For the investor, the issue is whether you believe the market has been overly pessimistic on its reading of interest rate trends. If it has, then these companies may very well be a good buy at today's price. If not, then rates could fall further and thus present a better buy at some future point.
Needless to say, trying to predict the future like this is a perilous and imprecise exercise at best. And it's for this reason that I encourage income-seeking investors to settle on dividend-paying companies that are surer bets -- that is, ones that aren't completely shackled to fluctuations in interest rates.
John Maxfield and The Motley Fool have no position in any of the stocks mentioned. 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.