In my last column I noted that with the cost of money rapidly dwindling -- 10-year and 30-year U.S. Treasury yields are basically flat Friday at 0.55% and 1.22%, respectively -- that it would be a good idea to invest your capital in sectors and companies that are putting your capital to work and earning returns in excess of those paltry rates.
If we set the bar that low, it is not difficult to find companies that exceed that rate of return, especially since, according to multpl.com, the S&P 500's dividend yield currently sits at 1.78%. This is scarily close to the low reached in the dot-com bubble of 2000, but it is always nice to have very little competition, especially when it comes to money.
So, that's the macro view, but what about the micro view? Are there companies that are still earning and paying out attractive dividends against today's low-rate backdrop? And if so, how risky are those dividends, given the Covid-19 depredation unleashed on the world's economy?
When searching for income investments, REITs are a good place to start, given that to maintain their tax-free status at the corporate level they must pay out at least 90% of their earnings. Obviously, though, a world in which Covid-19 has destroyed customer traffic to offices and shopping malls and joblessness (as seen with yet another monthly unemployment rate reading in excess of 10%) the earnings power of these companies is in question.
So, where do we go now? Do we try to bottom-fish through the REIT sub-sectors that were absolutely decimated in the Covid-19 blow-up?
For instance, NARIET's Lodging/Resorts sub-sector produced a total return of -48.9% in the first half of 2020 and regional malls fell 51.6%. Or do we leave those sectors to the professionals? Well, if you have been reading my columns, you would know that I am underwhelmed at the true corporate earnings power in this country, but overwhelmed by the market's Pavlovian response to any stimulus from the government, whether that be Fed bond-buying or Treasury cash-disbursals.
I want companies that are underpriced based on the fundamentals, not on the whims of Fed Chair Jay Powell and Treasury Secretary Steve Mnuchin and their seemingly unending quest to destroy all real returns from fixed income.
You may hew to the statements from Powell and Mnuchin, I would rather read reports from the always-boring National Mortgage News. According to NMN, quoting data from Attom Data Solutions:
The number of equity-rich mortgaged homes - those with combined loan-to-value ratios of 50% or less - totaled a little under 15.2 million for the second quarter and made up 27.5% of all loans. This compared with nearly 14.5 million and 26.5% one quarter prior.
The opposite pole of the market made similar strides. A shade over 3.4 million homes had a CLTV ratio of 125% or more, equal to 6.2% of all mortgaged properties. These seriously underwater homes dropped from 3.6 million and 6.6% in the opening quarter of 2020.
So, whatever the cause -- and let's not believe the government had nothing to do with it -- the troubled sectors of the U.S housing market were less-troubled at June 30 than they were at March 31. I believe that trend will continue and thus I am building positions in mortgage REITs. These companies buy mortgages, they don't actually originate them.
According to NAREIT:
The FTSE Nareit Mortgage REITs Index is a free-float adjusted, market capitalization-weighted index of U.S. Mortgage REITs. Mortgage REITs include all tax-qualified REITs with more than 50 percent of total assets invested in mortgage loans or mortgage-backed securities secured by interests in real property.
So, you wanted to invest in a sector that is getting bailed out? You found it. These names have been hammered, but beginning today, I am building positions in them, starting with Armour Residential (ARR) , a REIT I have mentioned in my column (though not for at least a year,) and a management team with whom I am familiar.
I want IRR (internal return of return) from my investments, and I am willing to take risks to get it. That's Economics 101. I have no idea what class Powell and Mnuchin are teaching, and, frankly, at this point, I really don't care.
