Two Harbors is unique … and a bit confusing. It’s a mortgage REIT, investing in residential mortgage-backed securities (RMBS) and related investments. In other words, this company owns mortgage paper and no property. If you’ve been following anything about the booming housing market and increase in mortgage lending for financial stocks, then you know trading securities in this corner market has been very lucrative.
And with data indicating red-hot demand in early 2013, it remains a seller’s market for homebuyers and mortgage lenders will keep doing brisk business.
Some investors are confused because of the recent spinoff of Silver Bay Realty Trust (NYSE:SBY), which actually owns physical real estate. But make no mistake — the existing mortgage paper business is still going strong. A rate hike from the Federal Reserve could hurt margins, but there remains little chance of increased interest rates in the near future.
Two Harbors just announced a 32-cent quarterly dividend. Yes, that’s down from 55 cents previously — but remember that it just spun off a big portion of its business, so this is not a cut due to hardship. And besides, that 32 cents annualized adds up to a 10.6% yield.
That’s nothing to sneeze at.