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The Highest-Yielding Stock You May Have Never Heard Of

Stocks in this article: ARR

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Amy Calistri

NEW YORK ( StreetAuthority) -- You've likely never heard of it. This company doesn't sell a physical product. It doesn't have storefronts. And it doesn't have massive headquarters in a glass building in Manhattan.

In fact, its office sits in an unremarkable three-story building in a small Florida town of just 17,000 residents. I'm almost certain the majority of people who pass this building are unaware of its significance.

This normal-looking building in Vero Beach houses the company with the highest-yielding stock in the U. S.

As I just said, I'd be surprised if you've heard of ARMOUR Residential REIT (ARR). This real estate investment trust is small -- the current market cap is just $600 million. But right now it is paying a dividend of 11 cents per share every month. At recent prices, that comes out to a yield of 18.6% per year. That's the highest yield I've found on a stock with a market cap of more than $500 million.

So how can any company pay a yield of nearly 20% per share?

ARMOUR is a REIT, but it doesn't own real estate like most do. It is what's known as a mortgage REIT. The company owns a portfolio of mortgage-backed securities either issued or backed by Fannie Mae and Freddie Mac.

Essentially, the company's business model is to raise money at low rates and invest in higher-yielding pools of mortgages. The REIT's profit is essentially the difference between those two interest rates.

But isn't it risky? After all, we've seen the headlines about the housing troubles. Poor-performing mortgage-backed securities are what led to the housing bubble popping nearly four years ago.

ARMOUR -- like most mortgage REITs -- invests only in securities backed by Fannie or Freddie. These government-sponsored enterprises (GSE) have the backing of the federal government. This means the securities backed by Fannie and Freddie in turn also have federal backing. Thus, the mortgage-backed securities carry almost no default risk.

But this doesn't mean the yields on mortgage REITs are guaranteed by any means.

Remember, a stock's dividend yield can change two ways -- either the dividend payment changes or the stock's price changes. And that's where there is trouble with many mortgage REITs.

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