Now that the threat of higher interest rates is off the table, a number of dividend stocks are rebounding nicely — particularly the real estate investment trusts.
The Federal Reserve has been reiterating that it will be a “considerable time” before it raises the Fed Funds rate, which should continue to be a benefit to the REITs, as they can still borrow short-term money at 1% – 2% or less. After all, they’re using that to make long-term mortgage loans at 3% – 5%, making for a very nice spread. It’s good news for investors as well, since the REIT then leverages that between 5 to 8 times to manufacture a hefty dividend.
So, it should come as no surprise that my favorite REITs are able to pay out whopping yields of 10% – 15%. Read on for three of my top REIT picks that you should consider owning in your income portfolio.
Capstead Mortgage Corporation (CMO)
Capstead Mortgage Corporation (CMO) is a floating-rate mortgage REIT in a market where bond yields were squeezed during the third quarter. In its Q3 report, CMO checked in with net income of $32.4 million and earnings of 30 cents per share, missing analyst estimates but beating the year-ago quarter.
Capstead Mortgage maintained its current quarterly dividend payment of 34 cents per share even though financing spreads on residential mortgages narrowed by 13 basis points to 1.09%, which impairs Capstead’s profit margins. But with the Fed now out of the way, bond yields are expected to rise, which in turn will help foster expanded profit margins at CMO. So, it’s a good time to get in on this 10% yielder if you aren’t already.
Javeline Mortgage Investment Corp (JMI)
Javeline Mortgage Investment Corp (JMI) is also well-positioned to benefit from a gradual widening of the spread between short-term borrowing rates and longer-term higher mortgage rates that will be tempered by a strong dollar. JMI invests primarily in fixed-rate, adjustable-rate and hybrid adjustable-rate residential mortgage-backed securities (RMBS).
At its current annual dividend payout of $1.80 per share, Javeline’s yield stands at 14.4%, which is generated from the use of 7.1x portfolio leverage off of 1.6% net interest margin. To cushion against market volatility, the company manages an active hedging program by use of swaps and “swaptions,” or options contracts giving the right to swap securities between the option’s buyer and seller.
With all the uncertainty out there, I prefer having exposure to a smaller, more diversified and hedged mREIT in pursuing double-digit yield. Like CMO, JMI has come up nicely, from $11 to $12.50, and it remains one of my favorite plays on this investment theme.
Orchid Island Capital (ORC)
Next up is an under-the-radar name: Orchid Island Capital (ORC) is a specialty finance company managing a portfolio of Agency RMBS, some of which would be considered somewhat exotic. However, in order to pay out a 15.6% current yield, you’ve got to be creative…and Orchid is getting it done in the current low-rate market.
For the third-quarter results reported on Oct. 27, Orchid earned net income of $6.8 million, or 63 cents per share. Third-quarter dividends totaled 54 cents per share, and book value was $13.27 per share, a 22-cent increase. ORC’s market cap is $182 million, so this is another small player in the sector, but one that is outperforming most of its peers.
Revenues are forecast to rise by 184% in 2014 to $23 million and by 52% in 2015 to $35 million. Insiders own 11% of the stock. Average daily volume is just over 334,000 shares traded, and the stock pays a monthly dividend. It should be a good environment for mREITs to thrive in as long as inflation remains tame, which makes owning names like ORC a no-brainer.
Bryan Perry is the editor of Cash Machine, a newsletter focused on high-yield income investing with the goal of maintaining a blended total yield of 10% across two portfolios. And most recently, Bryan introduced Cash Machine Trader. With this service, he’s increasing the income stream potential even further by using covered call writing strategies to generate yield in the form of option premium — on top of capital appreciation income from well-known stocks.