Western Asset Mortgage Capital Corporation (WMC)
First up is Western Asset Mortgage Capital Corporation (WMC), a mortgage real estate investment trust, or mREIT. These entities invest in mortgage-backed securities.
The great thing about Western is that the mortgages that it invests in are often secured by the federal government. WMC, however, buys some securities that are not guaranteed. The risk with mREITs are that they borrow money at low rates over the short term to finance long-term purchases. If near-term rates rise, that squeezes the company’s margins.
WMC also declared an unexpected dividend bonus at year-end because the company had hedged interest rates with various derivatives that resulted in additional net income.
The issue with Western’s dividend yield is simple: Is it sustainable? I think so, because WMC always reports funds from operations that allow the company to make good on its dividends. And that’s great, because right now, the dividend yield is a whopping 20%.
As long as we don’t get a massive increase in interest rates — which doesn’t appear to be in the offing — WMC should be safe for at least the next year.