High yielding stocks get a lot of attention these days, because of the low interest rate environment. The challenge for investors is, discovering which high yield will hold up. The REIT business holds many high yield candidates, but from what I can see, there are three numbers that make Hatteras Financial Corp. (NYSE:HTS) a buy at these levels.
An Idea As Old As The Market Itself
It’s ironic that the idea of investing in dividend paying stocks is being talked about as a fad. I’ve read multiple articles about a “dividend bubble” and whether the days of “buy and hold are over.” However, what most of these articles miss completely is a dividend payment is something as old as the stock market itself. Investors who give their money to own a piece of a company expect a return. What better way to get your return than in a quarterly dividend check?
What’s almost comical is how different analysts discuss the risks of high-yield stocks. In reality, a stock with a 2% yield might hold just as much risk of a dividend cut as a stock with a 7% yield. The yield is a function of the dividend versus the price, and shouldn’t be taken as a sign of weakness or trouble.
This Market Was Made For These Companies
In the mortgage REIT industry, you couldn’t really ask for a better environment. While it’s true that compression in their interest rate spread has cut into profits, most companies are still expected to pay impressive dividends. Since mREITs are required to pay 90% of their profits in distributions to maintain their tax status, a large distribution is the norm.
Hatteras Financial Corp. (NYSE:HTS) and Capstead Mortgage Corporation (NYSE:CMO) are somewhat unique, in the sense that they both focus on adjustable rate securities. Other competitors like Invesco Mortgage Capital Inc (NYSE:IVR) and Annaly Capital Management, Inc. (NYSE:NLY) focus on more fixed rate instruments. With the Federal Reserve expected to keep rates low for an extended amount of time, investors should have at least the next few years to capitalize on this environment.
Earnings Growth Is Important Even For High Yield Companies
Some investors make the mistake of thinking that a nice yield will save them from a company’s declining earnings. The problem with this strategy is, a company with less earnings in the future can’t protect its dividend the same as a company with earnings growth. Less earnings in the future means less distributable income and lower dividends in the mREIT space.
Of the four companies we’ve looked at, Hatteras Financial Corp. (NYSE:HTS) is expected to grow earnings by 4.47% over the next year or so, which is second best. The only company expected to grow faster is Capstead Mortgage Corporation (NYSE:CMO) at 4.61%. By comparison, Invesco is expected to grow earnings by 4.02%, and Annaly Capital is projected to grow EPS by 3.47%. With the second best growth rate of their peers, Hatteras seems to do okay by this measure.