Mortgage REITs Deliver Midteens Dividend in the Near Term

August 22, 2011

Mortgage REITs are expected to deliver dividend yields in the midteens range, driven by steep yield curves on the agency side and wide credit spreads on the nonagency side, says Douglas Harter, Vice President at Credit Suisse Group.

“The level of return is sustainable given the weaker economic data points we’ve seen, which should leave the Fed on hold at least until midyear of next year and probably longer than that. So that’s the near-term positive for the group,” Harter said.

Harter mentions Two Harbors Investment Corp. (TWO) as one of this favorite hybrid mortgage REITs. He says the equity markets have opened themselves to Two Harbors, and the REIT has raised $700 million between May and July, and also raised capital in the first quarter.

“Two Harbors invests in both agency MBS and nonagency residential mortgages. They tend to focus on more-credit-impaired nonagency bonds. They like subprime. They like option ARMs. They feel like those offer better risk/returns given what the assumptions they are able to price into those bonds,” Harter said.