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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

U.S. Mortgage REITs, The Best Place for 12% Dividend Yields Right Now

Companies / Dividends May 11, 2010 - 09:53 AM GMT

By: PaddyPowerTrader

Companies

Tom Dyson writes: This might sound strange, but I'm leery of high dividend yields...

As a full-time dividend stock analyst, I regularly screen the market for high-yield stocks. My searches usually bring up hundreds of results. Right now, for example, 95 stocks are yielding over 10%.


These dividend yields look great... until I look at the businesses behind them. They're mostly garbage. The high yield means the stock price has recently collapsed or the dividend payment is about to collapse... or both.

In other words, I generally treat high dividend yields the same way I'd treat a colorful snake: I steer clear.

That said, there are always exceptions to this rule. Over the years, I've been able to find pockets of rock-solid high-yield stocks buried in the trash. Recently, I found one of these "pockets" in the mortgage industry...

There are two types of mortgages. First, there are mortgages insured by the government. In the industry, they call these "agency" mortgages. Then, there are mortgages issued by private lenders like banks or mortgage companies. These mortgages do not have government backing. They call these "nonagency" mortgages.

Over the last three years, investors in nonagency mortgages have lost trillions of dollars. The recession has made it much harder for homeowners to make their monthly mortgage payments. Defaults, delinquencies, and foreclosures have soared. With no protection from a government guarantee, holders of these mortgages have lost fortunes.

Mortgages have caused losses for virtually anyone who touched them in the last 10 years. They are probably the last investment you'd consider buying right now. Normally, I'd agree with you, and I'd leave them with the rest of the junk my screens turn up. But look at this...

TransUnion is a credit reporting agency. Every month, TransUnion measures the number of mortgages that have gone 60 days or more without the borrower making a payment.

According to research from TransUnion, out yesterday, the 60-day delinquency rate for all mortgages fell this month for the first time in three years, from 6.89% to 6.77%.

One of the secrets to making profits in the stock market is to buy when things go from bad to less bad. And that's exactly what's happening in the mortgage market right now. For the first time in years, fewer people are defaulting on their loans.

The market is turning around. It's time to hold your nose and buy nonagency mortgages, even though they stink.

Mortgage REITs are stock market vehicles that specialize in investing in mortgages. Nonagency mortgages are still trading, on average, around 70 cents on the dollar. The handful of mortgage REITs that invest in nonagency mortgages are trading like junk bonds and paying 12%-18% dividends.

As fewer homeowners default on their mortgages, mortgage REITs should be able to generate more income and pay bigger dividends. As other investors realize mortgage REIT dividends are sustainable, they'll push up the stock prices, giving you capital gains, too.

In short, the mortgage market is moving from "bad" to "less bad" and it's giving us a rare opportunity to receive a safe, high income stream from the mortgage REIT industry.

Good investing,

Tom

http://www.dailywealth.com

The DailyWealth Investment Philosophy: In a nutshell, my investment philosophy is this: Buy things of extraordinary value at a time when nobody else wants them. Then sell when people are willing to pay any price. You see, at DailyWealth, we believe most investors take way too much risk. Our mission is to show you how to avoid risky investments, and how to avoid what the average investor is doing. I believe that you can make a lot of money – and do it safely – by simply doing the opposite of what is most popular.

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