Upping Your Bet on High-Yield, Red-Hot U.S. Mortgage REITs

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.
High-yielding U.S. mortgage Real Estate Investment Trusts (REITs) have been among the market’s top performers in 2012.
 
You already have exposure to this sector through Two Harbors Investment Corp. (TWO) — which not only boasts a 15.5% dividend yield, but also has held up remarkably well during the recent  market correction.
 
This week’s Dividend Pro recommendation ups your bet on the U.S. REIT sector through American Capital Agency Corp. (AGNC)
 
Boasting an eye-popping 15.8% yield, AGNC invests in residential mortgage pass-through securities and collateralized mortgage obligations. The principal and interest payments are guaranteed by government-sponsored entities, such as Fannie Mae or Freddie Mac, or by a U.S. government agency.
 
As dividend returns for mortgage REITs are significantly dependent on interest rate spreads, they tend to perform extremely well in low interest rate environments. The bigger the spread, the bigger the profits — and dividend payouts.
 
And the good times for REITs are set to continue for the next few years. Last month, the Fed’s policy panel reiterated that it does not expect rates to rise until late 2014 at the earliest. That means no significant margin pressure for mortgage REITs until then — and continued double-digit percentage dividend yields for investors in AGNC.
 
AGNC’s stock has been on fire, hitting a 52-week high even in the midst of a strong market correction. AGNC’s Q1 results handily beat analyst estimates, as the company reported earnings per share (EPS) of $1.42 for Q1 2012 versus an estimate of $1.16. That’s a whopping a 22.41% upside surprise. No wonder AGNC is one of the strongest performers in the already-strong REIT sector.
 
So buy American Capital Agency Corp. (AGNC) at market today, and place your stop at $29.00. Given the current turmoil in the markets, I’m going to hold off on recommending options on this one for now.
 
In addition, the recent market pullback caused us to stop out of the ETRACS 2x Leveraged Long Alerian MLP Infrastructure Index ETN (MLPL) yesterday, May 16.

Portfolio Update

Seadrill (SDRL) bucked the trend of a negative market and rose 1.06%. SDRL remains a HOLD.
 
Hospitality Properties Trust (HPT) dropped 2.66%. With the stock falling below $25.00, your June $25.00 call option that you sold as part of your "triple-digit strategy” is now up around 37%. HPT is a HOLD.
 
Vanguard Natural Resources (VNR) fell 3.91%. VNR provides an 8.9% yield and has doubled its distribution payments since early 2008. It recently announced a higher distribution payment, its sixth straight quarter of raising its distribution payment. Below its 50-day moving average, VNR is a HOLD.
 
Global X SuperDividend ETF (SDIV) dropped another 2.78% this past week. This monthly dividend payer remains a HOLD.
 
Two Harbors Investment Corp. (TWO) stayed flat this week. With its eye-popping dividend yield of 15.5% intact, and still above its 50-day moving average, TWO remains a BUY.
 
Hercules Technology Growth Capital (HTGC) dropped 0.55%. Facebook’s decision to raise the expected price for its initial public offering this week to $34-38 from $28-$35 has spurred interest this morning in the handful of publicly traded funds and investment companies that own the stock, including HTGC. Trading below its 50-day moving average, this bet on Silicon Valley tech is a HOLD.
 

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When it comes to how investors feel about the current market, I think a line from a song by the great rock and roll band Led Zeppelin says it best: “I’ve been dazed and confused for so long, it’s not true…” In fact, dazed and confused is perhaps the best description I can offer here regarding investor sentiment, because that’s precisely the mood I’ve picked up on here at the Las Vegas Money Show. This year more than any other in the past, including the über-confusing 2009

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