Take the Fed
There's money to be made here. The key is to own not only what the Fed is buying, but also what the Fed is proven to stand behind if the market turns. Buying mortgages during the turnaround and bailout has become more and more lucrative.
The easy way to participate is to buy companies that buy and own mortgages and mortgage bonds. Structured as real estate investment trusts (REITs), there are many in this segment; but not all are successful. Understanding the underlying mortgages and the structures of mortgage bonds is a specialized science. So it pays to be picky.
But it does pay. The group has performed well, with the Bloomberg Mortgage REIT index up more than 51% since the end of 2009.
There are two worth looking at within this group: MFA Financial (MFA) and Invesco Mortgage Capital (IVR). Both (especially MFA Financial) have proven to perform not just during the recent acceleration in profits over the past year, but also over the past few years, including the time of the more troubling market conditions.
Both trade inexpensively. MFA trades a slight discount to the book of bonds on its balance sheet. Invesco is valued right at book. Both are seeing assets grow-a positive side of the rally in the mortgage market noted above. And both carry some debt, but at a much lower rate with greater capital reserves than major US regulated banks are currently carrying.
Both continue to perform. MFA generated a return of 61.9% since the end of 2009, or an average annual return of 17.4%. Invesco generated similar returns for the period: an overall gain of 62.6%, or an average annual return of 17.6%.
MFA, with a dividend yield of 10%, should be bought ideally below $9 a share. Invesco, with a dividend yield of 12.3%, should be bought ideally below $24 a share.