3 Mortgage REITs With High Dividend Yields

For investors looking for income, real estate investment trusts are often an excellent source of potential investments. Mortgage REITs are a unique segment among the REIT universe, and many have extremely high yields as a result. Mortgage REITs are not without risk. These names purchase mortgages and generate income from the monthly mortgage payments. Mortgage REITs borrow money and then acquire mortgages and make a profit off the difference in the rate. As long as the borrowing of capital is done at low interest rates to purchase mortgages with higher interest rates then the REITs should perform well. The current low interest rate environment appears to be a good time for the trusts that operate in this industry. We believe that investors should always aim for quality when it comes to mortgage REITs. While even well-run mortgage REITs have significant risk, three of our favorites include AGNC Investment Corp. , Annaly Capital Management, Inc. , and Armour Residential REIT . High-Yield Mortgage REIT #1: AGNC Investment Corp. Founded in 2008, AGNC maintains a portfolio of residential mortgage pass-through securities, collateralized mortgage obligations (or CMO) and non-agency mortgage-backed securities (or MBS). The trust earns nearly all of its income from the interest on mortgages. AGNC has a market capitalization of just under $9 billion and generated revenue of $845 million last year. The trust has a net long position of $32 billion. Like many in the mortgage REIT space, AGNC uses leverage to increase its rate of return. In a rising interest environment, this would be a significant headwind to the company's ability to produce profits. With low rates likely for sometime as the economies of the world continue to deal with the COVID-19 pandemic, AGNC should benefit from the current environment for some time. The bulk of the trust's investments are fixed-rate agency MBS, with the majority of these having a 30-year maturity. This gives AGNC a long timeline to collect income from its assets. A large portion of AGNC's portfolio is guaranteed by government-sponsored enterprises. Additionally, AGNC does offer some geographical diversification as a significant portion of counterparties to asset are located in Europe. AGNC is seeing excellent results to start 2021. The trust had revenue growth of more than 700% compared to the prior year. Net spread and dollar roll grew 33% to $0.76. Some of this growth was due to a weak comparable period in the prior year due to the onset of the pandemic, but also because the trust's purchase and sales of agency MBS in the forward market (this means that AGNC purchased assets on a specific date, but the underlying mortgages are not yet known). Still, AGNC turned in a solid quarter and tangible book value improved 6% sequentially to $17.72. With the shares in in the mid-$16 area, AGNC is trading at a slight discount to tangible book value. The primary reason many investors hold mortgage REITs is that they offer a high yield in order to compensate shareholders for the risk involved in owning the security. AGNC does not disappoint here as the shares offer a yield of 8.6% at the moment. The company also pays a monthly dividend, which allows investors regular cash flows compared to most other securities, which usually pay dividends on a quarterly basis. Investors should note that the dividend has been cut several times over the years, most recently for the May 11, 2020 payment. On the plus side, AGNC's expected dividend payout ratio for 2021 is just 54%, which would be the lowest payout ratio in more than a decade if achieved. Even with the uncertainty surrounding the industry and the trust's history of dividend cuts, AGNC's current dividend appears to be safe for the time being. High-Yield Mortgage REIT #2: Annaly Capital Management Annaly primarily also invests in mortgage-backed securities and non-agency residential mortgages assets. In addition, the trust originates and invests in various other types of loans. Annaly is valued at $12.4 billion and produced revenue of $1.1 billion last year. The trust has an investment portfolio of more than $100 billion. Annaly separates itself from the traditional mortgage REITs in that it has a wider variety of income streams. The trust does receive income from its MBS and CMO assets, but has presence in other areas as well, such as loan origination, securities and commercial real estate investments. This allows the trust to focus on its better performing businesses when one encounters headwinds. The trust also is one of the larger mortgage REITs, giving it scale that few others enjoy. Investors should note that previously Annaly's leverage was far below its peer group, but that has changed recently as leverage was 6.1x at the end of the most recent quarter. This was down by 10 basis points on a sequential basis. Annaly struggled at the appearance of COVID, with revenue declining almost 90% in the first quarter of last year. The most recent quarter showed a return to growth in a major way, with revenue improving 1,517% year over year. Funds from operation improved 38%. Compared to 2019, the trust's top line improved 72% and bottom line matched, showing that Annaly performed well even against a more normalized period. Book value grew 2.5% to $8.92, which is just above today's share price. Annaly cut its dividend early last year in a preemptive move to protect itself in the face of the pandemic. The annualized dividend of $0.88 equates to a yield of 10%. The trust has cut its dividend many times over the last decade, with the annualized dividend accounting for just a third of the dividends distributed in 2011. The trust has an expected payout ratio of 84%, which would be one of Annaly's lowest results since the turn of the century. This could mean that Annaly's financial position is much stronger than it has been. High-Yield Mortgage REIT #3: Armour Residential REIT Armour focuses almost exclusively on residential mortgage-backed securities. The trust has a market capitalization of $811 million and revenue of $81.5 million last year. The trust has an investment portfolio of less than $8 billion, making it considerably smaller than many of its peers as its investment portfolio. While Armour is also considerably less diversified than the other names discussed here, the assets the trust invests in are almost all guaranteed or issued by a government entity. This provides some more assurance that the mortgages can be repaid. Typically, these loans are backed by Fannie Mae, Freddie Mac or Ginnie Mae. However, Armour's most recent quarter showed that the trust continues to face significant headwinds tied to the pandemic. Revenue fell 61%, marking the fourth consecutive quarter that the top-line figure was lower than the prior period. In fact, the revenue loss accelerated compared to prior quarters. Core and comprehensive income were down substantially as well. Book value was $12.40 at the quarter's end, which is nearly 10% higher than the most recent closing price of $11.24. Armour is another trust that pays a monthly dividend. A stressed business model led to Armour's suspension of it dividend early last year. When the trust did reinstate its dividend in June 2020, it was at a nearly 50% cut. The dividend was raised 11% for the very next monthly payment and has been maintained through the most recent announced distribution date. The shares yield 10.7% and the annualized dividend of $1.20 is expected to consume all of the company's funds from operation this year. The payout ratio, recent cut and still struggling business make Armour's dividend the least safe of the names discussed here, though we do believe it is a positive that the dividend has remained steady for more than a year.

3 Mortgage REITs With High Dividend Yields

The current low interest rate environment appears to be a good time for the trusts that operate in this industry.

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