A Lucrative Play in the REIT Sector
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Investors who are seeking portfolio growth can definitely find it in the REIT sector. With the low federal funds rate that is slated to continue at least through the next two years, both residential and commercial real estate buyers are sure to benefit.
CYS Investments (NYSE: CYS) is a strong player in the REIT arena. The firm continues to operate with extremely strong risk management practices, aligning its investor interests with the company's overall management philosophy. This not only helps to keep the numbers strong, but can also offer an overall good feeling for investors in the company's shares.
In this article, I will discuss why I feel that CYS can provide investors with growth and income in both the short- and long-term -- especially given its positive future outlook for earnings and its high dividend yield.
Looking at the Fundamentals
CYS is one of the stronger players in the REIT sector, which is across the board faring quite well in this time of historically low interest rates. These low rates alone will help CYS as the Federal Reserve has decided to keep the federal funds rate at near 0% at least through the end of 2014.
This company focuses on investing primarily on a leveraged basis in residential mortgage pass-through certificates whereby both the principal and interest payments are guaranteed by a government agency such as Fannie Mae, Freddie Mac, or Ginnie Mae.
On the income side, CYS pays its investors an annual dividend of $2 per share, yielding nearly 15%. In addition, the estimates for CYS's earnings per share are $2.23 for 2012, and $2.21 for 2013. So far this year, CYS shares are up approximately 8%.
Recently, the "Stop Trading on Congressional Knowledge Act," or STOCK, can also pave the way for more good news for REITs in general, and certainly for CYS too. The key purpose of this legislation is to stop those members of Congress -- as well as the president -- who have insider knowledge regarding companies from trading on such details.
One of the primary benefits of the STOCK act could turn out to be more faith from the public in certain government-run agencies such as Fannie Mae and Freddie Mac. This can be a good factor too, as over the recent past confidence in such agencies has been waning. The STOCK legislation also provides more transparency in terms of insider responsibility, and it aims to provide a much more level playing field for all investors.
Even though CYS has a somewhat low P/E ratio, it is showing an extremely competitive performance in relation to other REITs in the sector. And, because CYS is a relatively new company -- formed in 2006 -- it could be experiencing the forward moving potential that many new comers obtain in the market.
With this potential momentum as well as the positive public sentiment that is engendered by the STOCK Act, CYS's future cash flows, earnings ratios, and other growth indicators all look strong going forward.
Other REIT Industry Players
One strong contender in the REIT sector that is promising in terms of both income and growth is American Capital Agency (NASDAQ: AGNC). With $101 billion in assets under management, the firm presently provides investors with an annual dividend of $5 per share, which yields roughly 15%. In addition, year-to-date the company's shares are up almost 20%.
American Capital had first quarter 2012 income of more than $640 million. Moving forward in both the near and the long-term, this company could present a great buying opportunity -- especially if its shares were to drop below $30.
Newcastle Investment (NYSE: NCT) has also been faring well in today's low interest rate environment. With a P/E ratio of 2.66, and a dividend yield in the neighborhood of 13%, this could be another promising opportunity for growth and income investors, primarily if they could pick up shares at or below $6.
The shares of Resource Capital (NYSE: RSO) are also faring nicely. This stock sports a P/E ratio of roughly 4.20, along with a dividend yield of just below 15%. Resource Capital recently announced that it will be issuing preferred stock that is yielding 8.5%. These shares began trading on June 15. If shares of Resource Capital drop to below $5 per share, this too could be a very good opportunity for investors.
Another great buy for investors who are seeking high dividend returns is ARMOUR Residential REIT (NYSE: ARR). The future growth prospects along with its dividend could make this one a very good choice.
Earlier in the year, ARMOUR reported a second quarter monthly cash dividend of $0.10 on its common shares. This provides an annual dividend yield for investors of more than 17% and a 52-week dividend yield in excess of 19%. In addition to its new preferred shares, ARMOUR also priced an underwritten public offering that consisted of 30 million more shares of common stock.
The Bottom Line
Although there are several good buys in the REIT industry, I feel that CYS could provide a bit better overall return than the other companies. CYS boasts a P/E ratio that is higher than the average for the real estate industry as a whole.
Plus, given the low interest rate environment that is expected to last for at least another two years, coupled with its strong performance and future outlook, I feel that CYS is a great buy -- especially if shares could be picked up below $14 -- for those who seek growth over time, as well as for dividend income while they wait.
jewishitalian31 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.
