Mortgage REITs Offer Great Yields, but Big Risks Remain

 

NEW YORK (TheStreet) -- Mortgage real estate investment trusts, which helped cause the last financial crisis, are still considered a risky bet.

So why in the world would you want to invest in names like Annaly Capital Management  (NLY) and American Capital Agency Corp. (AGNC) ?

The Federal Reserve Bank of Richmond warned last year that investors in mortgage REITs "face significant risks on a number of fronts," and those risks haven't gone away.

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Still, if the broader stock market goes sideways -- and given that the S&P 500 is up 16.5% over the last 12 months in a middling economy, you would be wise to question how much higher it can go in the near term -- mortgage REITs will continue to deliver outsized dividends until the Federal Reserve starts raising interest rates.

Annaly yields 11% and AGNC yields 12.15%, making them among the highest yields in the sector. That, coupled with the fact that they are also among the largest mortgage REITs, is why they are the most widely followed.

Still, Keefe Bruyette & Woods analyst Michael Widner, who calls himself "on the positive side of neutral" with regard to the whole sector, prefers AGNC when it comes to those two names. In addition to AGNC, he has outperform ratings on Hatteras Financial (HTS) Two Harbors Investment Corp. (TWO) and MFA Financial (MFA) , among several others in the sector.

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