As much of the Fed's quantitative easing strategy, or QE3, has involved placing large amounts of capital into agency mortgage backed securities, what will happen to REITs when this round of quantitative easing ends? In this article, I will discuss why REITs, and particularly Annaly Capital Management, Inc. (NYSE:NLY) , will still produce strong dividend yields in both the short and the long run.
While it is likely that most of 2013 will see low interest rates for mortgage REITs, it is still uncertain as to just exactly how long the Fed will continue this bond buying program in order to stimulate the U.S. economy.
This could signal a continued downward pressure on bond yields that are earned by REITs, resulting in lower asset yields, lower net interest rate spreads, and ultimately lower dividend distributions. However, I feel that those mortgage REITs that are well diversified will still be able to continue to provide high dividend payouts.
Annaly Capital reported a lower net interest spread and asset yields in the fourth quarter of 2012. Because of well-managed expenses by those at the helm, the company's expenses actually decreased by 36% throughout the past year.
Annaly is working hard to further diversify its overall portfolio. One move in this direction is the company's acquisition of CreXus Investments for $13 per share, or a total value of $872 million. This represents a major step forward by Annaly in its commitment to directly invest in commercial real estate assets.
The all-cash offer by Annaly Capital to purchase the remaining shares of CreXus is just a part of the company's overall capital allocation strategy that is not only aimed at strengthening the firm's commercial real estate platform, but also to diversify its investment portfolio.
Annaly presently pays its shareholders an annual dividend of $1.80 per share, equating to a dividend yield of roughly 12%. The firm's fourth quarter 2012 net income of just over $700 million represents a significant increase over the company's net income of $445 million in the fourth quarter of 2011. This is likely one of the catalysts responsible for Annaly's shares rising more than 7% year-to-date in 2013.
Other REITs of interest
Even with a drop in its net income, CYS Investments Inc (NYSE:CYS) is still providing the potential for both income and growth to its shareholders. Although CYS Investments Inc (NYSE:CYS) posted a fourth quarter 2012 net loss of more than $41 million, the REIT reported just over $58 million in net investment income during that same time.
Since then, the share price has dropped -- especially in light of the vast difference in performance between 2012's third and fourth quarters. CYS Investments Inc (NYSE:CYS)' third quarter net income was more than $240 million, or $1.46 per share.
Many see this fall in share price as a real buying opportunity, especially in light of the fact that the company is still paying its shareholders a $0.40 per share quarterly dividend, which equates to a dividend yield in excess of 13%. On top of that, CYS Investments Inc (NYSE:CYS) announced at year-end 2012 that the company was also paying its shareholders an additional special dividend of $0.52 per share. In addition, CYS Investments Inc (NYSE:CYS) also announced at the end of 2012's fourth quarter that it was declaring a Series A Preferred Stock cash dividend of $0.484375.
American Capital Agency Corp. (NASDAQ:AGNC) has had higher asset yields, due in large part to the rise in its interest yielding assets during the first quarter of 2013. This comes despite the low interest rate environment created by the Fed. This company is believed by some to be a pre-payment protected portfolio.