7 Ways to Earn High Income From Other People's Mortgages

Unlike REITs which often own, manage and operate residential and/or commercial real properties, mortgage REITs hold and/or service mortgages and related mortgage portfolios. Several financial experts and MoneyShow contributors review several ways for sophisticated income investors to participate in this high-yield market via mREITs, preferreds and funds. John Freund, BullMarket Two real estate related stocks rank as the highest-yielding holdings in our portfolio. How dependable are these double-digit yields after all? Short answer: They're as solid as it gets. Let's dig into the numbers and lay out exactly why we're so confident. New Residential -- yielding 11.7% -- pioneered a whole industry by purchasing the right to service mortgages from banks that were offloading those rights when post-2008 regulations prohibited them from holding too many mortgages on their books. While that strategy has been extremely successful for the company, it has recently been diversifying its operations, dedicating $2 billion to Residential Securities and Call Rights, which hedge against the core business line. That's a solid long-term strategy and places the company on surer footing in case of a broader housing market downturn. When it comes to assessing the risk around a dividend, many simply assume that a larger payout is more speculative in nature. While that is usually the case, it doesn't offer a complete picture. After all, the underlying health of the company and management's historical dividend coverage (or lack thereof) are both key indicators of how reliable that payout is going to be for the future. Fortunately, New Residential passes our tests on both fronts. The company has covered its dividend out of current cash flow in each of the last 12 quarters, and has even raised its dividend many times in that period. In 4Q18, the company earned $0.58 per share and paid out $0.50, so there is ample coverage here on core earnings alone. As long as the business continues at this level, the yield looks secure. Over that 12-quarter span, New Residential has averaged an 82% core earnings payout ratio, meaning on average, just 82% of core earnings went to cover the dividend. That's an astounding figure for a company with a double-digit yield. There's no sign of a cash crunch here and hasn't been for the last three years. New Residential could even raise its payout yet again and we'd still feel safe given management's sterling coverage history. When it comes to overall health, it's safe to say that New Residential is as robust as a thoroughbred. Book value (a measure of what a company's underlying assets are worth) has increased 60% over the last five years. This includes a 6% bump last year that would have been much higher if not for volatility in the final quarter taking the final number down from its mid-year peak. The company ended 2018 with a $16.25 book value, up from just $10.00 when it was founded in 2013. Annaly Capital Management -- yielding 12.0% -- is the largest mortgage REIT in the world, investing in mortgage-backed securities via a somewhat complex process known as repurchase agreements. For our purposes, these arrangements let Annaly engage in debt financing arbitrage, and they make money by selling and repurchasing debt over short periods of time in order to take advantage of small pricing discrepancies. It takes scale to pull off an arbitrage program, which is where Annaly shines. Repurchases are a great business model when the economy is humming along and interest rates are low, then increases in risk as interest rates rise. Fortunately, the climate of rising interest rates has ended for the time being, with the Fed declaring that the tightening cycle has ended. Suffice it to say that Annaly's business model has weathered all obstacles over the years of high and low interest rates, bull and bear equity markets. And the environment looks even stronger in the near future. The company has kept its dividend stable or increased it every year for the last five years. Meanwhile, leverage has remained steady and management continues to produce strong book value per share (above $10), meaning the underlying health of the company is solid. We can rest comfortably knowing that Annaly raised its dividend even during the great 2008-9 recession, which is a heartening story in itself. As the economy cratered, management paid off mortgages that the government insured through Fannie Mae, Freddie Mac and Ginny Mae. When the homeowners themselves defaulted, the company obtained the underlying loans and received payment from the agencies, covering the losses. Granted, the stock is only up 4% on the year, but remember we're not in Annaly for price appreciation. We're in it to bank that beautiful 12% yield, and given the fundamentals and track record, we're confident there aren't any cutbacks in the near future. Bryan Perry, Cash Machine Mortgage REITs, also called mREITs, have been bumping along the bottom of their respective trading ranges but that underperformance could be about to change. The pivot by the Fed, which has bond yields trading considerably lower than at the end of 2018, changes the investment proposition to favor having some exposure to the mREIT sector. Reduced interest rates translate to improving fundamentals in the form of stable book values, robust housing activity and solid mortgage credit performance. Those factors are causing me to recommend a mortgage REIT with an enticing yield today. AGNC Investment is a real estate investment trust primarily focused on the development of a mortgage portfolio, the majority of which are made by government-sponsored agencies like Fannie Mae and Freddie Mac. This is a lower-risk strategy than that employed by other mREITS and has proven to be effective in producing reliable income where the stock yields a very appealing annual dividend yield of 12% and offers a monthly payout. The high yield is more of a function of the shares declining from $22 back in September 2018 to the current price of $18, reflecting investor concerns that rising interest rates would deter AGNC Investment's future cash flows, as higher interest rates both on the short and long end are assumed to work negatively on finance companies that borrow short and lend long. The current landscape of rates flattening out, housing activity picking up and the Fed not having a bias on the direction of rates creates a favorable environment for mREITs and AGNC Investment in particular because of the high level of creditworthiness of the mortgages in their portfolio. AGNC Investment's portfolio is leveraged around 8.6 times capital as of the end of 2018. The company also employs a wide-ranging and highly liquid hedging strategy to minimize volatility from unforeseen moves in the bond market. The mREIT pays a monthly dividend of $0.18 per share. The $2.27 per share in forecasted earnings for 2019 and $2.36 guidance for 2020 are sufficient to support the $2.16 annual dividend. The next ex-dividend date will fall on or around April 29 with the payment date coming in about 10 days thereafter. Let's get long in AGNC Investment in this favorable environment for mREITs and lock in a juicy yield for our Aggressive High-Yield Portfolio. Jack Adamo, Insiders Plus I continue to recommend a strategy of holding preferred stocks and bonds for protection from deflation, Fed financial repression and low interest rates. With the Fed keeping interest rates steady or even lowering them over the next few years, I think the small risk of rising rates has virtually disappeared. Our latest recommendation is a preferred stock that has a high yield that I think will also eventually translate into capital gain opportunities as investors search for yield. The AGNC Investment Corp. Dep. Pfd. Rep. 6.875% Cumulative Redeemable Pfd. Series D is a new preferred from the mortgage REIT AGNC Investment Corp. Until 4/15/2024 its cumulative dividend is 6.875% per annum ($1.71875 yearly or $0.4296875 per quarter) based on its $25 redemption price; at that price as I write this, the yield is slightly higher. The dividends are paid quarterly on 1/15, 4/15, 7/15 & 10/15 to holders of record on the record date, which is the first day of the month in which the payment is due. (Note: the ex-dividend date is one business day prior to the record date). After 4/15/2024 dividends will be paid at a floating rate of the Three-Month LIBOR plus 4.332%. The AGNC Pfd. D is selling near its redemption price, so there's not much chance of capital gain unless the shares rise to a price above redemption that makes it worth our while to sell. That is possible, but unlikely, since the yield is worth keeping, even at a somewhat elevated market price. Buy only with a limit order, never a market order. Also, be careful, there are two other AGNC preferreds out there. They have higher yields, but are priced above redemption value and are redeemable already, so buying them could cause you to lose money. Harry Domash, Dividend Detective Mortgage REITs, which invest in loans used to finance real estate purchases, generally outperform in a low interest rate environment such as we're currently experiencing. Consequently, we're adding mortgage REIT PennyMac Mortgage Investment Trust , an industry leader in terms of shareholder returns, to the portfolio. PennyMac pays a 9.0% dividend yield and has returned 27% over the past 12-months and averaged 25% annually over the past three years. Meanwhile, in our ETF Growth Opportunities portfolio we are buying iShares Mortgage Real Estate , which holds a portfolio of U.S.-based Mortgage REITs. iS Mortgage is paying an 8.8% dividend yield and has averaged a 14.5% annual return over three years vs. 10.6% for Invesco. In addition, we have created a new portfolio based on Leveraged ETFs which are Exchange Traded Notes (ETNs). Like ETFs, these notes track the performance of a specified index, but unlike ETFs, ETNs don't actually own the underlying assets. These funds, termed 2X funds, use borrowed cash to produce, in theory, twice the returns that they would if they weren't leveraged. That is, in an up market, they go up twice as far as un-leveraged funds, and drop twice as much in a down market. Actual results don't exactly match the theory, but they're in the same ballpark. We're starting with two ETNs. Our first addition this new model portfolio is Credit Suisse X LINKS 2X Mortgage REITs , which tracks an index of U.S. Mortgage REITs. Credit Suisse X LINKS 2X Mortgage is currently paying a 21.7% dividend yield and has returned 20% over 12-months. It started in trading in July 2016, so three-year returns are not yet available.

7 Ways to Earn High Income From Other People's Mortgages

Sophisticated income investors can participate in this high-yield market via mREITs, preferreds and funds.

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