The Federal Reserve, via Chairman Bernanke's testimony to Congress, signaled this past week that interest rates would not be going up for a long time. That in my opinion opens up opportunities with a stock sector I have been avoiding, mortgage backed securities stocks. MBS stocks are REITS that hold residential pass thorough securities that are guaranteed by an agency of the federal government. These generally are issued by Fannie Mae and Freddie Mac, but can be any agency of the federal government that guarantees home mortgages. These REITS make their money on the spread between the cost of short term borrowing and the income from higher rate longer term mortgage securities. Your principal is guaranteed, but the value of a mortgage security depends on interest rates. If rates are rising your value goes down because the spread between already held securities and rising short term interest rates narrows. REITS are required to pay our essentially all their profits each quarter and are taxed at normal rates not advantaged dividend rates. The advantage for shareholders is that these stocks produce superior dividend income, sometimes nearing 20%. That is not a typo,these are real pay outs. Stock prices for these securities tend to be quite static as there is little growth of capital, only payout of high dividend income.
The threat to these stocks is a rising short term interest rate. When that happens it is not unusual to see share prices move down quickly. Many investors avoid these stocks just for that reason. So with the Federal Reserve signaling that short term rates will be not rising anytime soon now might be the time to take the dive into these stocks. Less risk of capital loss and nice dividends make these stocks attractive. Normally the way to value a stock is thus GDP plus dividend plus inflation. Below I will outline three of them I like at this time.
Annaly Mortgage..., symbol NLY, The biggest of these MBS stocks by a large margin. In fact NLY is so big it is bigger than all the rest put together. If you are looking for the best of breed NLY is it. Payout currently is about 14%. The point with NLY is they have many adjustable rate mortgages that have to be recycled over and over. Of course in a static rate environment the only problem there is the cost of the transaction. So for the time being the payout is likely solid. Long experienced management team makes for a good company as well.
Hatteras Financial....symbol HTS, A new company that has only been in business of a few years. It is headquartered in North Carolina, so if you like local stocks this is one. HTS gas the most floating rates in the MBS universe, so if rates rise this stock will be the least adversely affected. For the few years they have been in business they have shown excellent smarts in navigating the MBS environment. Current payout is about 15%.
Cypress Sharpridge..symbol CYS, I have mentioned this one in an earlier posting. I had wanted to sell a option on this stock, but circumstances and prices did not work out so I passed on the position. With a 18.5% current payout this one certainly has appeal. Most of their mortgages are 15 year based so if you believe interest rates are not going up for a good bit this stock is your choice.
There are several other stocks in this category, MFA, CMO, AGNC, CIM, and some others. Most have solid double digit dividends and most are pretty solid in this rate environment. I would suggest you do your own due diligence before buying.
I currently hold either a long position or option in HTS.
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