Chimera and Invesco Mortgage Capital Inc (NYSE:IVR) are two good examples of non-agency mREITs. The advantage of non-agency mREITs are the higher net interest spreads, but they also come with a price. That price being that the amount of leverage these REITs can utilize tends to be lower than agency-backed mREITs, and the potential for losses based on default is also very high.
American Capital Agency, Annaly Capital Management, and CYS Investments Inc (NYSE:CYS) are three perfect examples of agency-backed mREITs. You’ll give up some net interest margin potential owning these three names as opposed to Chimera or Invesco, but these agency-backed mREITs also come with the added protection of having their MBSes protected against default. The end result is that they can ultimately use leverage to a much greater, and arguably safer, degree than non-agency mREITs.
My oh my, that dividend!
But, let’s face it: The most impressive aspect of American Capital Agency — and why investors can’t get enough of the company — is its dividend.
Unlike most companies highlighted in this weekly series, American Capital isn’t going to give its shareholders consistent increases. All dividend payouts are based on the previous quarters’ operating conditions. Even without that certainty, there’s been little downside to American Capital’s dividend over the previous four years.
Source: Nasdaq.com.
With the prospect that MBS’ will soon become more abundant as the Fed lessens its own buying, I foresee American Capital’s dividend remaining stable, or perhaps even heading higher than its current $5 per year. The current yield is a whopping 15.3%.
Foolish roundup
We’re about to enter the true sweet spot for mREIT growth; that point in between where the Fed begins winding down its bond-buying, and when it actually boosts its target lending rate — which isn’t expected to occur prior to 2016. That’s going to give mREITs about 8 to 10 quarters to absolutely run wild! For American Capital, that could amount to cumulative distribution of $10 to $13 per share for investors.Unless the Fed drastically changes its view of the economy, American Capital appears to be a safe bet for the income seeking investor.
The article 1 Great Dividend You Can Buy Right Now originally appeared on Fool.com.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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