Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

How to Win Bernanke's War on Savers with a 19% Interest Rate Yield

Companies / Dividends Jan 18, 2012 - 07:07 AM GMT

By: Money_Morning

Companies

Best Financial Markets Analysis ArticleMartin Hutchinson writes: There is no other way to put this... With his zero interest rate policy (ZIRP), U.S. Federal Reserve Chairman Ben Bernanke has declared a virtual war on the nation's savers.

That's why savings-conscious investors have been forced out into the markets these days in search of higher yields.


Between 10-year notes offering yields under 2% and CD rates hovering near 1%, savers have been left little choice.

It is one of the reasons why high-paying dividend stocks have been in demand ever since the ZIRP crisis began.

For savvy investors looking to boost their yield, there's only one place to look...

They're called mortgage REITs, and they offer investors the chance to collect some of the highest dividend yields available today.

In fact, one of these investments is actually paying a 19% yield, right now!

That's not a typo. Double-digit yields like those really can be found if you know where to look for them.

I'll tell you more about this company in a moment. But first I'd like to explain to you what mortgage REITs are all about.

Mortgage REITs Explained

Real Estate Investment Trusts, or REITs, came into existence because of U.S. President Dwight Eisenhower's "Cigar Tax Excise Tax Extension" of 1960. Under this initially obscure tax provision, REITs can avoid corporate income tax, provided they invest in real estate-related assets and pay out at least 90% of their income in dividends to investors. Mortgage REITs, as their name suggests, invest in residential and commercial mortgages. Within the residential mortgage REIT category, some invest in agency-guaranteed REITs while others specialize in REITs that are not guaranteed. Given the recent default rate on home mortgages, investors would be wise to concentrate on guaranteed agency mortgage REITs. This is due in part to Ben Bernanke's monetary policy since 2008. Let me explain...

How Mortgage REITs "Goose" Yields

If agency mortgage REITs simply bought home mortgages on an unleveraged basis, they would be safe but boring investments, because their yield would be only about 4% currently.

Of course, their principal would be government guaranteed, though it would fluctuate with the level of interest rates.

But since there's not a lot of money involved in selling 4% yields to retail investors, mortgage REITS goose their returns by using leverage.

They borrow in the short-term market, usually by entering into "repurchase agreements" with the mortgages they have bought (they can do this because of the guarantee on the mortgages).

Since Bernanke has kept short-term interest rates close to zero for over three years, this is very profitable, maybe adding 2.5% to the yield of an unleveraged mortgage portfolio after expenses for each unit of leverage.

Thus, a portfolio leveraged 1-to-1 (with $100 of equity and $100 of repurchase agreements) would yield roughly 6.5%, while a portfolio leveraged 2-to-1 would yield about 9%, etc.

One mortgage REIT,American Capital Agency Corp. (Nasdaq: AGNC)actually takes this to an extreme, with leverage of about 9-to-1.

Consequently, AGNCmanages to pay out a dividend yield of 19.9% -- and earn somewhat more than it pays out.

How Rising Rates Effect Mortgage REITs

However, there are no free lunches in life.

Consequently, what a mortgage REIT gains in yield through leverage, it gives up in risk.

Of course, there is little danger of principal loss on the mortgage investments - they are government guaranteed. That much is secure.

However, rises in interest rates affect mortgage REITs in two ways.

If short-term interest rates rise, the spread between their funding cost and what they earn on the mortgages becomes less profitable, and their yield declines.

More dangerous, if long-term interest rates rise, the value of their mortgage portfolio declines. Since they are leveraged, it does not have to decline all that far for their capital to be affected.

For instance, with $9.00 of debt to every $1.00 of equity for a company like AGNC, a rise of about 2% in long-term interest rates would make the company insolvent.

That's the risk. You can hedge against it using swaps and options, and AGNC does so, but it's unlikely that hedges could cover a really sustained upward move in interest rates.

The upside is that Bernanke and the Fed have said that they do not intend to let short-term rates rise before the middle of 2013.

They also have a $400 billion "Operation Twist" program of selling short-term Treasuries and buying long-term Treasuries. That works against any sudden rise in long-term Treasury yields.

So to a large degree when you invest in REITs, you are trusting Bernanke. But that has worked for more than three years, and there's no reason it should not continue to do so.

However, as a responsible investor, if you buy a mortgage REIT you should follow monetary policy closely, and reassess your position every six months or so.

Two Ways to Invest in Mortgage REITs

That being said, here are two mortgage REITs to consider:
  • American Capital Agency Corp. (Nasdaq: AGNC): AGNC is large and liquid, with $47 billion of assets and market capitalization of $6.3 billion. As I discussed, the company pays a $1.40 per share quarterly dividend, giving it a yield of 19.9%. It is priced about 5% above book value and is leveraged 9:1 - which makes AGNC a high risk, high-return proposition.
  • Annaly Capital Management (NYSE: NLY): NLY is also very large and liquid, with $100 billion of assets, but leverage is only about 6:1. NLY pays a dividend of $0.57 per share, while priced at only a 1% premium to book value. Thus, overall this is a more conservative choice.
  • So don't let the Fed's war on savings keep you from earning the yields you deserve. The right mix of high-yielding dividend stocks can help replace what the Fed has taken away.

Source http://moneymorning.com/2012/01/18/how-to-win-bernankes-war-on-saverswith-a-19-yield/

Money Morning/The Money Map Report

©2012 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive



© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules