Editor’s note: This column from Steve Freehill — winner of our reader submission contest — is part of our “Best Stocks for 2013″ series. Stay tuned for more entrants today, and check back tomorrow for a wrap-up of all the picks.
Two Harbors (NYSE:TWO) is my favorite stock pick for 2013 — and in a departure for a contest like this one, it’s a good choice for an income investor.
Two Harbors is a mortgage REIT, which means that you get all attendant benefits there (outsized payouts chief among them). But it also spun off a public company by the name of Silver Bay Realty Trust (NYSE:SBY), which went public in December. And that’s where the real value lies.
Over the past three years, Two Harbors has been out buying up single-family homes at maximum discount, repairing them, and renting them out. Most of them were bought in Phoenix, Tampa, Las Vegas and Atlanta. Two Harbors gobbled up some 3,100 homes — and now Silver Bay has around $220 million in cash from the IPO to buy more. As part of the spinoff IPO, Two Harbors received nearly 18 million shares of SBY. So Silver Bay’s success will trickle to the bottom line at Two Harbors. (Silver Bay is also expected to restructure itself into a REIT in the near future — read more about the spinoff here.)
Think of it — what a fine dividend all those rental receipts should make for any retirement account.
At around $11.70, TWO is sitting at a spot to enter, and is yielding close to 19%. Yep, you read that right … 19%. True, the recent $0.55 payout announcement skews the yield (previous dividends were $0.36 and $0.40 quarterly), but even if the yield normalizes, it’s still north of 12%. The fiscal cliff deal (such as it was) has washed out most of the downside fear of tax increases on REITs, and I don’t think interest rate increases — the only real risk for a mortgage REIT — on the horizon.
Everything about the timing of this buy is the greatest, and I have great conviction. And I’m putting my money where my mouth is … I bought this stock in December with a little over 5% of investable funds.
Did I mention I feel great about this trade?
At the time of publication, Freehill was long TWO.