This could sound surprising, but I am suspicious of high dividend yields…
Being a expert dividend stock analyst, I regularly examine the stock market for high-yield dividend stocks. My searches generally bring hundreds of results. At this time, for example, 95 stocks are yielding more than 10%.
These dividend yields look impressive until I look at the companies behind them. But these are generally rubbish. The high yield means the stock price has recently dropped or the dividend payment is just about to drop… or both.
In other words, I in general consider high dividend yields the same manner I would treat a colorful snake: I steer clear.
That said, there are always exceptions to the rule. Throughout the years, I’ve been in a position to discover pockets of rock-solid high-yield stocks dumped in the garbage. In recent times, I found one of these “pockets” in mortgage industry…
There are two different forms of mortgages. 1. Agency Mortgages: The mortgages insured by the government. 2. Nonagency Mortgages: These mortgages don’t have government backing and these are issued by private lenders like banks or mortgage companies.
In past three years, investors who invested their money in nonagency mortgages have lost trillions of bucks. The recession has made it much hard for the property owners to make their monthly mortgage repayments. Non-Payment, delinquencies as well as foreclosures have increased like anything. The investors who invested their money in these mortgages have lost their fortunes since there is no protection from a government guarantee.
Mortgages have created huge losses for the investors who touched them in the last 10 years. They’re the last investment preference that you’d consider buying if you’re planning for investment. I will agree with you, also leave them with the rest of the useless items my screens turn up.
Typically, I’d agree with you. However look at this for a while.
TransUnion is the third largest consumer credit reporting agency in United States, that provides credit-related information to potential creditors. Every month, TransUnion measures how many mortgages that have gone 60 days or more without the borrower making a payment.
In accordance to the latest research report from TransUnion, the 60-day failure rate for the entire mortgages dropped this month for the 1st time in last 3 years, from 6.89% to 6.77%.
Among the ground rules of earning profits in the stock market is to buy while things move from bad to less bad. Moreover that is what happening in the mortgage market right now. A smaller amount of individuals are defaulting on their loans for the 1st time.
The market is turning around. It is a good opportunity to purchase nonagency mortgages, regardless that they stink.
Mortgage Real Estate Investment Trusts (REIT) are stock market instruments that focus in investing in mortgages. Nonagency mortgages are still transacting, on average, approximately 70 cents on the dollar. The few mortgage REITs that invest in nonagency mortgages are trading like junk bonds as well as paying out 12%-18% dividends.
As lesser quantity homeowners failure to pay on their mortgages, mortgage REITs should be able to make more earnings and pay bigger dividends. As other investors understand mortgage REIT dividends are sustainable, they’re going to push up the stock prices, giving you capital gains, too.
Briefly, the mortgage market is moving from “bad” to “less bad” and it’s giving us a rare opportunity to receive a secure, high profits stream from the mortgage REIT industry.
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categories: Investment,Investing,Personal Finance,Wealth Building,Stocks and Funds,Stock Market,Dividend Stocks
