Are These 3 High-Dividend Mortgage REITs Attractive Right Now?

With interest rates still hovering near historic lows, quality high dividend stocks are increasingly difficult to find. One of the best sectors for finding high-yielding stocks today without taking on too much risk is mortgage REITs.

Each of these three mortgage REITs offer investors a lucrative dividend yield that is at little risk of being cut for the foreseeable future. That said, none of them offer attractive growth potential due to the extremely low interest rates facing the economy right now.

Inflation continues to rage at levels not seen in years while interest rates continue to be held down by policy makers.

The negative real interest rate environment is a bad thing for mortgage REITs, since it means their primary source of income – interest payments – will likely fail to rise with inflation.

However, a rising interest rate cycle could be a catalyst, and the Federal Reserve has indicated the potential for a rate hike in 2022.

As a result, investors could certainly do worse in the current environment and these mortgage REITs can help fill a void in many income-focused investors’ portfolios by providing a needed yield boost.

Although we do not rate these three mortgage REITs as buys right now for new investors, we believe they remain decent holdings for income focused investors.

Three mortgage REITs that we will analyze today to see if there are worth buying are:

  • AGNC Investment Corp. (NASDAQ:AGNC)
  • Annaly Capital Management Inc. (NYSE:NLY)
  • Starwood Property Trust, Inc. (NYSE:STWD)

Mortgage REITs are popular for their high yields. But as always, proper due diligence must be done.

Mortgage REITs: AGNC Investment Corp. (AGNC)

a person in a suit holds a tiny house to represent reits to buy
Source: Shutterstock

AGNC invests primarily in residential mortgage securities, including collateralized mortgage obligations that are guaranteed by the U.S. government.

With an 8.5% forward dividend yield, AGNC certainly offers investors appetizing yield. Furthermore, with an expected 2021 payout ratio of just 54% the dividend looks quite sustainable at current levels.

On top of that, the trust reported strong Q1 results in late April.

Net book value per common share grew by an impressive 6% during the quarter and the REIT generated an overall economic return on tangible common equity of 8.2% to shareholders during the period alone (37% annualized).

That said, AGNC does carry a heavily leveraged balance sheet and is highly sensitive to downturns in the housing market.

While the housing market is booming today, if/when it turns the book value per share will likely plunge as it has in the past.

Additionally, the dividend has been cut repeatedly over the past decade and we expect the future to be no different whenever a downturn occurs, though the historically low payout ratio should help mitigate some of this risk.

Overall, we think AGNC is a decent income play, but total return expectations should be kept in check given that the earnings stream has proven to be wildly volatile. As a result, we rate it a hold.

Annaly Capital Management, Inc. (NLY)

Commercial shopping center in a tropical climate
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NLY invests in a diversified portfolio of residential and commercial real estate assets.

These include agency mortgage-backed securities, non-agency residential mortgage assets and residential mortgage loans.

The REIT also originates and invests in commercial real estate investments such as mortgage loans and securities. Lastly, they provide financing to middle market businesses backed by private equity.

On a dividend yield basis, NLY is even more attractive than AGNC given that its forward yield is a whopping 9.6%.

However, the expected 2021 payout ratio of 84% is much less conservative and the book value per share growth of just 0.3% during Q1 is much less impressive than AGNC’s.

The upside for NLY is that their earnings stream is more diversified – and therefore likely more stable – than many of their mortgage REIT peers.

As a result, their current earnings-per-share and dividend-per-share levels are likely much more sustainable for the foreseeable future, meaning that their total return prospects are decent.

Overall, NLY’s income yield looks pretty safe and is very attractive. Meanwhile, its growth prospects are weak, but not as risky as some other mortgage REITs.

On the whole, total return potential is in the mid-to-high single digits, making the stock a quality holding for income investors.

Mortgage REITs: Starwood Property Trust, Inc. (STWD)

Image of a man holding a key chain with a key and house attached to the key ring over a office desk in the background
Source: Shutterstock

STWD operates four segments: commercial and residential lending, infrastructure lending, property, and investing and servicing.

The commercial and residential lending segment handles all aspects of a diverse array of commercial and residential loans, ranging from origination to acquisition, to financing and managing them.

The infrastructure lending segment executes a similar business model with infrastructure debt investments.

Meanwhile, the property segment acquires and manages equity investments in stabilized commercial real estate, particularly multi-family.

Lastly, the investing and servicing segment employs a more aggressive and hands-on investment strategy that involves acquiring and managing troubled assets and a wide array of CMBS among other investment ventures.

STWD’s dividend yield is the lowest of the three, though it is still quite high at 7.4%. Their Q1 results were unimpressive as distributable earnings-per-share were stagnant sequentially, moving from $0.50 to $0.49.

Additionally, revenues saw a whopping 8.1% year-over-year decline. That said, the company also has a strong foundation for future performance as management took advantage of favorable market dynamics to add core equity assets to its investment portfolio.

During Q1 management deployed $2.7 billion across its business segments.

Given the current low-rate environment and their high 96% payout ratio, we think it is unlikely that STWD will be able to generate much growth for the foreseeable future.

However, we do expect them to be able to maintain their dividend thanks to their diverse sources of income which provide greater stability for their earnings stream than what is typically seen with other mortgage REITs.

Overall, we rate STWD as a decent holding for income investors due to its attractive yield and reasonable valuation, although investor expectations should be somewhat tempered by the company’s lack of growth.

On the date of publication, Bob Ciura did not have (either directly or indirectly) positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Bob Ciura has worked at Sure Dividend since 2016. He oversees all content for Sure Dividend and its partner sites. Prior to joining Sure Dividend, Bob was an independent equity analyst. His articles have been published on major financial websites such as The Motley Fool, Seeking Alpha, Business Insider and more. Bob received a bachelor’s degree in Finance from DePaul University and an MBA with a concentration in investments from the University of Notre Dame.


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