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High-Yielders that Benefit from Rising Rates

09/26/2016 9:00 am EST

Focus: REITS

Tim Plaehn

Investment Research Analyst, Investors Alley

These two safe, high-yield stocks that both yield over 8% will become even more profitable as interest rates rise, explains income expert Tim Plaehn, editor of The Dividend Hunter.

For the last several years, two commercial mortgage lending REITs have been shifting their portfolios so that their financial results will be even stronger when interest rates start to increase.

Both companies have been originating the bulk of their new commercial mortgages with variable interest rates. So if short-term interest rates go up, so will their revenues.

At the same time, they have been locking in their borrowing costs at the current low-interest rates. When the Fed does get around to raising rates, these companies will be more profitable and should start paying even higher dividends.

Blackstone Mortgage Trust (BXMT) is a finance REIT advised by the large asset management company, Blackstone Group LP (BX).

In May 2013, Blackstone took the basically non-operational Blackstone Mortgage Trust and re-purposed the REIT to offer commercial mortgages.

Blackstone Group manages a large portfolio of commercial properties and can feed leads to the REIT. Blackstone Mortgage retains the loans it originates and generates profits on the difference between the interest it charges and the company’s low cost to borrow money.

BXMT focuses on making larger mortgage loans, with an average loan size of over $160 million. The average loan size to property value is around 60%.

Currently, 78% of the company’s $7 billion loan portfolio is floating rate and new loans are only being made with variable rates. The stock yields 8.4%, so it’s a good income producer whether or not interest rates do start to increase.

Starwood Property Trust (STWD) is a finance REIT that has been a public company since mid-2009. The company is now one of the largest providers of commercial property mortgages and commercial mortgage services.

Starwood also retains most of the mortgages it originates and the portfolio has a conservative 61% loan to property value.

In the portfolio, 100% of all new loans are floating rate indexed to LIBOR, and 89% of the total loan portfolio is floating rate.

In its earnings information, the company management indicates that for each 1.0% increase in short-term interest rates, the STWD annual earnings per share will increase by about eight cents. Starwood yields 8.5%.

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By Tim Plaehn, Editor of The Dividend Hunter

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