Buy This Low Risk 17% Yielding Portfolio
Adnan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
This article presents a three stock portfolio for investors looking for high regular income for their retirement portfolio. The short-listed stocks include Two Harbors Investment (NYSE: TWO), New York Mortgage Trust (NASDAQ: NYMT) and Western Asset Mortgage Capital (NYSE: WMC). The remaining of the investment thesis aims to look into the business models of each of the companies and determine whether future earnings catalysts will help sustain current dividend yields.
The Portfolio
The constructed portfolio offers a total return of 18.6%, including regular income in the form of elevated dividend yield of 16.8% with complete diversification. Such high dividend is exceptional in the US, where the 10-year Treasuries are offering only 1.99%. This portfolio holds special value as yield hungry investors find little opportunity to enhance their regular income as the Fed is committed to keeping the short-term rates near zero. The combination of the aforementioned stocks provides exposure to Agency & non-Agency, fixed rate & adjustable rate mortgage backed securities, real estate properties and distressed securities.
The following table summarizes the dividend yields and upside offered by these stocks.
|
Stocks |
Dividend Yield |
Capital Appreciation |
Total Return |
|
WMC |
17.0% |
4.0% |
21.0% |
|
TWO |
17.6% |
0.0% |
17.6% |
|
NYMT |
15.7% |
1.6% |
17.3% |
|
Portfolio |
16.8% |
1.9% |
18.6% |
Western Asset Mortgage Capital Corporation
Western Asset Mortgage, a relatively new hybrid mortgage REIT, invests in Agency residential mortgage-backed securities, non-Agency mortgage-backed securities, commercial asset-backed securities, and asset-backed securities. Therefore, as far as its investment portfolio is concerned, it’s completely diversified within this sector. This diversification will cause little damage to the company’s bottom line due to the Fed’s quantitative easing. The stock is currently offering 17% dividend yield and is trading at 3% discount to its third quarter book value. The company has yet to report its fourth quarter performance.
Two Harbors Investment
Where Western Asset Mortgage Capital is a hybrid mortgage REIT, Two Harbors operates as a completely diversified REIT. It owns an MBS portfolio, like a debt REIT, and has real estate investments from which it receives rental income, just like an equity REIT. The company’s MBS portfolio is further invested in Agency and non-agency MBS, which are both fixed rate and adjustable rate in nature. Therefore, Two Harbors provides more diversification than other REIT. The stock is currently offering 17.6% dividend yield and is trading at 8% premium to its fourth quarter book value.
New York Mortgage Trust
New York Mortgage Trust is invested in mortgage related investments, such as Agency ARMs and Agency IOs. The company primarily aims to invest in distressed markets. However, later on non-Agency residential mortgage backed securities; Agency RMBS consisting of ARM and hybrid adjustable-rate RMBS, multi-family CMBS and distressed residential single family loans were also made part of the companies target portfolio. Therefore, this mortgage REIT’s investment portfolio is further diversification as it provides exposure to distressed securities.
Earning Catalyst
Mortgage REITs receive yields on the mortgage backed securities they hold. These yields on MBS are linked to long-term mortgage rates. Since the beginning of the Fed’s quantitative easing programs, mortgage rates have felt a downward pressure, decreasing MBS yields. However, the situation has started to reverse since the beginning of the current year. The 30-year mortgage rates increased 22 basis points while the 15-year mortgage rate climbed 13 basis points. Increased mortgage rates mean increased yields on MBS, resulting in increased income and increased shareholder distributions. Therefore, I believe investors can expect dividends distributions for the aforementioned companies to continue in the coming quarters.
Foolish Takeaway
The portfolio provides elevated dividend yield on low risk as it provides well diversification. Therefore, investors looking for regular income should consider these stocks as part of their retirement portfolio.
equityfinancials has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!
