Time to Bet on Mortgage REITs

The first quarter is now in the record books as the stock market has posted its best gains in 16 years.

What is not to be believed is that the first week of the second quarter kept up the bullish momentum while heading into a new financial-reporting season in which S&P earnings have been forecast to fall by 3.9% year-over-year. However, FactSet surveys claim that S&P earnings will hit a trough in the first quarter of 2019 and will begin to accelerate throughout the balance of 2019.

When I add these facts to the assumptions of more record dividend increases, stock buybacks, mergers and acquisition activity, a strong dollar, low inflation and a dovish Fed, I reach the conclusion that the path of least resistance for stocks is up. The global slowdown bears got it wrong. The United States, which accounts for 24% of global gross domestic product (GDP), is going to lift the world economy out of its soft patch back to full health when President Trump levels the playing field with China.

And China seems to be functioning just fine with the modified tariffs. The latest round of upbeat manufacturing data out of China was a real head turner as global equities rallied to their highest levels in six months after a second batch of data showed that the Chinese services sector had risen to a 14-month high in March — as tariffs continue to be fully in place. This news was not well embraced by the liberal financial media, which is rapidly losing the bearish narrative on the current health of the global economy.

But politics aside, one sector I’ve avoided for some time is now starting to look like a potential opportunity — mortgage real estate investment trusts (REITs). Sometimes considered the red-headed stepchild within the entire REIT universe, these mortgage stocks provide the most outsized dividend yields of all the sub-sectors in the REIT universe. To offer a full disclaimer, I’m coming back into this sector wearing asbestos gloves.

It is easy to get quickly burned by highly leveraged pools of mortgages that are separated out in the opaque world of first, second, third and non-rated tranches. These tranches were highlighted in the hit movie “The Big Short,” which laid out how the Great Recession came to be. So, now that the Fed has gone from a position of “we’re a long way from normalizing interest rates” back in September 2018 to “a patient Fed has adopted a wait-and-see stance, this change begs the question of what should income investors buy if the Fed is done for the cycle.

Well, if rates aren’t going to move up in the foreseeable future, then it would behoove all of us who are hungry for yields to consider the shot of adrenaline that has just been administered to every aspect of the real estate market. If the economy is going to produce 2.0%-plus GDP growth with the Fed holding back on rate hikes, it’s no wonder the FTSE NAREIT All REIT Index is about to trade to an all-time high that has not been seen since 2007.

The chart of the FTSE NAREIT All REIT Index below clearly shows how the strength of the residential, office/industrial, retail, self-storage, manufactured home, data center and apartment REITS have carried the overall index to challenge a new high. After bottoming out at 60 in March 2009, the index has rallied 366%. That’s why buying real estate on the floor of the New York Stock Exchange with the click of a mouse and selling it with the click of a mouse makes way more sense than doing it on your own.

Regarding the red-headed stepchild in the REIT space again, mortgage REITs as a whole have seriously lagged behind when compared to their brethren REIT classes. But I sense that a turn is in the making. If the value of mortgage REITs rises from their current levels back to levels that have not been seen since 2013, this change could result in a gain of close to 40%, not including dividends.

Speaking of dividends, the one mortgage REIT I’m about to recommend to my Cash Machine subscribers pays a dividend with a yield of 12%. Now, that is what I would call either crazy or an all-world opportunity. I’ve been cherry-picking undervalued high-yield securities since 1985, based on my experience and instincts. It would behoove those who seek superior income and capital appreciation to come with me by signing up as a member of Cash Machine. Then, you’ll be able to own this trade when I go live with it this week.

To be sure, Cash Machine is not about settling for average yields. It is a highly proactive advisory that targets creative income opportunities that few, if any, of my investment advisory service rivals will uncover early on. And that’s the secret sauce — buying early on, before the rest of the crowd discovers where the smart money has already been invested.

Sign up for Cash Machine today by clicking here and put my 35 years of Wall Street experience to work for you. All you need is a cup of coffee and five minutes a week to boost your portfolio’s income three to five times what it’s currently throwing off.

Why not? You deserve it.