Annaly: Time for a Mortgage REIT?

06/03/2016 7:00 am EST

Focus: REITS

Bryan Perry

Editor, Cash Machine, Premium Income, Quick Income Trader, Instant Income Trader

Jeff Gundlach of the DoubleLine Funds, recently said it’s time for income investors to consider jumping back into the mortgage real estate investment trust sector, notes Bryan Perry, editor of Cash Machine.

The rotation into mREITs, as they are known by in Wall Street vernacular, is hugely notable given the inherent leverage of 6:1 typical for these investments.

This sector is easily spooked as was the case in January when many of the most widely held mREITs lost 20% or more of their share value because the Fed was sending a clear message of its intention to raise interest rates.

Now, when professional money is buying mREITs, it’s a clear “market tell” that big money does not believe the Fed has an option to raise interest rates any time soon.

When I see this kind of confidence return to a sector that just three months ago took investors through a gut-wrenching correction, the upside technical breakout gets my full attention.

If earnings for the S&P are going to remain flat and the market stuck in a trading range for the balance of the year, there is a strong case for locking in a blended dividend yield of 10%+.

With the pensions, endowments, retirement plans and fixed income investors starving for yield, this sector call may have legs.

For our Aggressive High-Yield Portfolio, I’m adding Annaly Capital (NLY), which pays a current dividend yield of 11% and is the 800-pound gorilla in the mREIT sector.

The company pays an annual dividend of $1.20 per share or $0.30 per quarter and has been paying this rate since December 2013.

The company ended the first quarter at 5.3x leverage, which was an increase from its 5.1x ratio at the end of the fourth quarter.

This number is still less than the 6.3x ratio it operated with before the taper tantrum. So Annaly will be less vulnerable to rate hikes than it was in early 2013.

It also has some flexibility to pick up any distressed paper that’s being discarded by investors who might be forced to sell.

In this current lower-for-longer rate environment, Annaly shares could trade with a yield of 9.0%, which would translate to a share price of $13.30 representing a projected one-year total return of 32%.

This sector has come to life and institutional money flow is very bullish.

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By Bryan Perry, Editor of Cash Machine

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