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An 11% Yield With Potential Growth: Hatteras Financial Corp. (HTS), Annaly Capital Management, Inc. (NLY), and American Capital Agency Corp. (AGNC)

With short-term interest rates as low as they have been in years, it’s not surprising that investors are looking for a better yield on their investments. The current environment has made mortgage REITs very popular because of their high-yields. However, there is one company in this space that looks like the best overall play. Invesco Mortgage Capital Inc (NYSE:IVR) might not be the most well known name in this space, but I would argue this is one of the best REIT values around.

Annaly Capital (NLY)

Many high yields aren’t worth the paper they are printed on
There are many choices when it comes to high-yielding companies. According to the CAPS Screener, there are 444 companies rated by the CAPS community with yields of at least 5%, and more than 80 that have yields of better than 10%. Invesco Mortgage certainly makes this list, and other mREITS like Hatteras Financial Corp. (NYSE:HTS), Annaly Capital Management, Inc. (NYSE:NLY), and American Capital Agency Corp. (NASDAQ:AGNC) are also among these ultra high-yield stocks.

However, investors need to be very careful when they tread among the 10% yielders. Companies like General Electric Company (NYSE:GE), BB&T Corporation (NYSE:BBT), Telefonica S.A. (ADR) (NYSE:TEF), and Frontier Communications Corp (NASDAQ:FTR) are all companies that at one point yielded better than 10% before their dividends were cut. A current high yield means virtually nothing, instead investors need to look at the company’s future earnings and cash flow to determine if their yield will survive.

The good news for mREITs is the Federal Reserve is expected to keep short-term interest rates low for the foreseeable future. The bad news is this same entity is keeping longer-term rates artificially low with their bond buying program. In the end, mREITs are still able to do well, but just not as well as they did in the past. Smart investors need to ignore trailing yields and look at what should be expected from these companies in the next year or so.

Separating the contenders from the pretenders
While no mREIT is expected to grow earnings at a terrific rate over the next year or so, there are differences between companies. For instance, Invesco and Hatteras Financial Corp. (NYSE:HTS) are expected to post earnings growth of 4.02% and 4.3% next year, while Annaly Capital Management, Inc. (NYSE:NLY) and American Capital Agency Corp. (NASDAQ:AGNC) are expected to see growth of 2.38% and 2.97%, respectively. While this doesn’t sound like a big difference, a 1% change in earnings is multiplied because of each company’s use of leverage.