This mREIT Offers Double-Digit Yield
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Invesco Mortgage Capital (NYSE: IVR) is one of the most attractive dividend stocks, yielding an astounding 14.26%. But it is quite risky, as well. The stock performance is a roller coaster, with numerous dips and jumps for this year. The bottom-line is a loss for this year so far. However, this is offset by its yield, which is higher than its share growth. Shares of Invesco might soar if FED decides to continue with its favorable low-interest atmosphere.
Despite its volatility, Invesco Mortgage Capital showed strong profitability metrics. It has attractive valuation metrics, as well. Its current yield is way above the average yield of many companies. It is also higher than the current rates of 10-year and 20-year US Treasury Notes.
Diversified Portfolio of Assets
Invesco Mortgage Capital is a real estate investment trust (REIT) that focuses its investments on mortgage loans and mortgage backed securities (MBS) for residential and commercial properties. In a relatively volatile macroeconomic environment, diversification is imperative to balance the risk.
Invesco diversifies its portfolio by having exposure to both agency MBS and non-Agency MBS. The agency MBS comprised about 69% of its assets while the remaining 17% are non-Agency MBS. The Agency MBS further comprised of 30-year and 15-year fixed rate.
Invesco Mortgage is a mid-cap firm with strong market capitalization of $2.5 billion. In its latest financial results, it reported net income of $335.4 million from the $389.3 million revenue. The profit margin is high at 88.22% while its operating margin showed a higher rate at 89.26%. For the past three years, Invesco has shown increasing net income.
This may be a good sign of management’s utmost efficiency in handling the company and its financials. However, is Invesco the best REIT for dividend investing? To answer this question, a closer look at its closest peers would be greatly beneficial.
The most speculative one
ARMOUR Residential (NYSE: ARR) is one of the few REIT companies that surpasses the high yield of Invesco. While its yield is high, its annualized dividend has been declining since 2010. In 2012, the monthly dividend was cut three times, and for this year, there were already two dividend cuts.
This triggered the alarm to many investors regarding the profitability of investing in ARMOUR. If the company continues to cut the dividend, shareholders may start selling their shares to look for more stable investment opportunities. This could potentially trigger further selling off, pulling shares of ARMOUR down.
However, the U.S. long-term bond yield is currently in an upward trend. If the uptick continues, the net interest spread of ARMOUR may go up in the ensuing quarters. This could stop the dividend cut and shift to dividend increase. But until then, ARMOUR may continue to cut the monthly dividend, making it less attractive and riskier, as well. Shares of ARMOUR lost almost a quarter of their value this year.
Another Diversified mREIT
MFA Financial (NYSE: MFA) has a diversified asset portfolio, 60% Agency MBS and 40% non-Agency MBS. It is a dividend stock with lucrative yield of 10.15%. Just like Invesco Mortgage Capital, the company diversified its assets portfolio into Agency and non-Agency MBS to balance the risk.
MFA investors should closely watch the housing market in California. This is where MFA levered many of its assets at approximately 46%. Presently, it is enjoying the home price appreciation of the region, with Los Angeles and Alameda posting the highest increase. This was fueled by rising demand amid low mortgage rates and limited housing supply.
According to a Wall Street article, bought and resold homes in California have risen to their peak since 2005. MFA Financial will greatly benefit from the rise of the California housing market. This will fuel MFA shares growth and help maintain its high dividend yield. For this year, shares of MFA posted positive returns year-to-date.
The King of the Jungle
Annaly Capital Management (NYSE: NLY) is the industry leader. It is a high-yielding stock but has experienced declining share prices. The stock is still quite attractive with a yield of 13.47%. However, it is also a very risky investment given the declines since the middle of 2012. Annaly shares have already lost 6.6% as of June 19. Compared to the same day of the previous year, shares have shed off 13.4%. This offsets the earnings gained from the annual dividend.
But at the current price level, it is already cheap. This makes it quite attractive and a good investment opportunity to secure a position in a high-yielding dividend stock. Annaly is quite aggressive in expanding its asset portfolio to improve its profitability. But as a defensive stance, this is very risky considering the high volatility of the REIT industry.
Among the above companies, ARMOUR Residential has the highest dividend yield, but the risk is also high. This is due to its declining annualized dividend on top of shrinking share prices. However, the industry outlook fueled by rising bond yields offers a gleam of hope for the company. There is the potential that it will eventually stop cutting dividends and start increasing them instead.
A safer investment is Invesco Mortgage Capital, which also has a high dividend yield of 14%. The risk is reduced when it spreads its asset portfolio into Agency and non-Agency MBS. The company also has Agency residential mortgage-backed securities (Agency RMBS). These are securities for which a federally-chartered firm or the US government agency guarantees the payment of interest and principal. These are more secured properties that further strengthen the stability of the company. The firm has commercial MBS, as well.
On May 6, 2013, Ladenburg Thalmann upgraded the stock from neutral to buy. At present, three analyst firms are recommending a strong buy, while three others advise a buy. However, five firms put the rating at hold; none advise a sell. This further implies that now is probably the best time to invest in a high yielding dividend stock like Invesco Mortgage Capital.
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