investing

3 Great Picks to Earn 8% - 11% From Mortgage REITs

The main hazard to these high-yielding investments is a gap between short- and long-term rates.

Interest rates average about 4.1% for a 30-year home loan. But mortgage REITs, which invest primarily in pools of residential mortgages, have found ways to yield much more. The firms use some of their own cash to buy mortgage-backed securities. They also load up on short-term debt to buy assets, and many boost their payouts with other types of real estate loans or direct lending to property owners.

All this may sound like a house of cards. But the business does feature an important safeguard: Most big mortgage REITs stick mainly with securities issued by government-sponsored firms, such as Fannie Mae. That effectively eliminates credit risk.

Risks to your money. The main threat to mortgage REITs is if short-term rates rise without a corresponding bump in long-term rates, squeezing their income (and dividends). The gap between short-term and long-term rates has narrowed recently. The Fed has raised short-term rates twice, while long-term rates, which are set in the bond market, have eased. Yet mortgage REITs have held steady—returning an average of 10.8% in the first quarter of 2017—partly because the firms have maintained their payouts. Jeffrey Gundlach, CEO of DoubleLine Capital Management, sees a tougher rate climate for mortgage REITs this year. But he advises holding the stocks. “Investors should not expect price gains, but the dividends alone should lead to decent returns this year,” he says.

How to invest. Annaly Capital Management (NLY, $11, 11.0%), the largest mortgage REIT, with $87.9 billion in assets, invests primarily in government-backed mortgage securities. Income from those investments could dwindle if the gap between short- and long-term rates shrinks. But Annaly has been expanding into adjustable-rate mortgages, which would do better than fixed-rate loans if rates were to rise. It has also been adding commercial real estate loans and other types of loans to its portfolio, investments that may help Annaly maintain its payouts.

Blackstone Mortgage Trust (BXMT, $31, 8.0%) isn’t a traditional mortgage REIT. Affiliated with Blackstone Group, a large commercial property owner, the firm makes loans to developers and real estate owners in North America and Europe. Nearly 90% of its portfolio consists of floating-rate loans that will yield more as short-term rates climb. Furthermore, Blackstone’s portfolio of loans is expanding, and the firm possesses plenty of financial firepower to buy more assets and hike its dividends, says Credit Suisse, which rates the stock “outperform.”

The best bet for fund investors is iShares Mortgage Real Estate Capped ETF (REM, $45, 9.5%), which recently owned 34 stocks, with a tilt toward the biggest firms. The fund holds some cash and shares of other real estate firms that don’t pay as much as those that primarily invest in mortgages. The ETF, which charges 0.48% annually in fees, returned 9.0% annualized over the past five years.

Most Popular

Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer
Coronavirus and Your Money

Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer

The IRS has an online tool that lets you track the status of your stimulus checks.
February 19, 2021
Want More Tax-Free Retirement Income? One Man’s Whole Life Decision
life insurance

Want More Tax-Free Retirement Income? One Man’s Whole Life Decision

Whole life insurance might not be something that’s on your retirement planning radar, but for this client, here’s how it served his need to control ta…
February 23, 2021
The Current Plan for $1,400 Checks
Coronavirus and Your Money

The Current Plan for $1,400 Checks

Here's what you need to know about the stimulus check plan currently being considered in Congress for President Biden's COVID-relief package.
February 18, 2021

Recommended

The 13 Best REITs to Own in 2021
REITs

The 13 Best REITs to Own in 2021

Real estate offers diversification and much more income than the market average. These are 13 of the best REITs you can buy as 2021 comes into focus.
January 15, 2021
11 High-Yield REITs for Big Income
Investing for Income

11 High-Yield REITs for Big Income

The old '4% rule' has recently crept up to be the '5% rule.' This collection of high-yield REITs can still help you reach that threshold in pure incom…
November 20, 2020
20 of Wall Street’s Newest Dividend Stocks
dividend stocks

20 of Wall Street’s Newest Dividend Stocks

Many companies have cut or killed their cash distributions in 2020, but these new dividend stocks have either started or kept up freshly initiated pay…
July 24, 2020
5 Great REITs to Buy Now
REITs

5 Great REITs to Buy Now

In an awful year for many real estate investment trusts, our picks should thrive.
July 4, 2020