Before moving on to fresh topics and kicking over rocks in the corners of the market, I want to address one more market segment where I have found a few stocks to buy. The alternative-income, high-yield stocks have long been a favorite of mine. I have found that a collection of higher-yielding, traditional real estate investment trusts, mortgage-backed REITs, commercial real estate finance companies and business development companies have delivered outstanding long-term returns. The caveat is that I would move even slower and stay smaller than usual with these securities.
The alternative-income stocks usually provide plenty of bumps and bounces that allow me to add to my positions at lower prices. There will be stock offerings that depress the price and dividend cuts and changes that move the stock prices around quite a bit. As I wrote in a recent piece on income investing, the idea here is not to have a concentrated portfolio but to buy a lot of them and add a little when they are cheaper. It is also important only to buy these when they trade below net asset value.
Most of these have rallied so far this year and pickings are a little slim. If I were putting a new portfolio together today, I would start with Annaly Capital (NLY), the granddaddy of mortgage REITs. The shares are trading at about 90% of NAV and sport a generous dividend yield of 11.6% at today's price. Management is diversifying the business a bit by buying Crexus (CXS). Adding commercial mortgages to the portfolio makes sense to me, but this is just an initial toe in the water for Annaly, so it will not add much to the bottom line initially. The Federal Reserve's mortgage buying and low-rate policy limits new opportunities for the mortgage REITs, but this M-REIT has done a good job of negotiating differing environments and I see no reason this time will be different. Again, I would not be a pig here, but just buy a little with the idea of adding lower.
I would buy a little ARMOUR Residential (ARR) as well, although I am not pleased at the recent equity below asset value. It reduced the dividend again to $0.07 from $0.08 a month. Even after the cut, the shares yield 13%. I would rather see a dividend cut than a leverage increase to maintain the payout at this point in the cycle so the recent cuts haven't scared me off yet. As the housing market recovers, ARR should be well positioned to stabilize the payout and see the shares trade higher. It has a solid portfolio and after adjusting for hedges, the duration of the asset mix is just 1.5 years. I am down a little from my initial purchase but I like ARMOUR as a long-term alternative-income holding.
I really want exposure to commercial real estate so I am willing to buy Apollo Commercial Real Estate Finance (ARI) at 90% of net asset value. Commercial real estate has not recovered as quickly as the residential markets but there are signs of improvement. There is $1. 6 trillion of CRE loans that will need to be refinanced over the next five years as we reach the outer limits of extend and pretend, and that is going to create significant opportunities for Apollo. We have done very well with alternative-income vehicles associated with Apollo Global Management in the past, and I expect to do so with its CRE Finance offering. The hedge fund and asset manager has extensive real estate and finance assets under management, and its expertise should help the finance REIT turn in stellar long-term returns.
That wraps up my view on the world and what I think is cheap enough to buy right now. It is interesting that outside of small banks and long shots, which are separate businesses and portfolios in my mind, I can only find 25 stocks to buy now at current prices. Even if I jumped into a full 2% starting position, new portfolios would only be 50% invested. Since I am a scale buyer, the vast majority of the time the actual percentage would be less than that initially. There is no excess of cheap stocks now. While that is not a market call, it does serve as something of a caution flag for me.