Unsatisfied with your low, single-digit dividends and bond yields? Investors can squeeze out more income with mortgage-backed real estate investment trusts and exchange traded funds, but you will have to be comfortable with the potential risks.
Mortgage REITs are leveraged investment companies that borrow to buy mortgages and other real-estate related securities, writes Kathy Kristof for Kiplinger. [Mortgage REIT ETF Yielding 12% Starts Year Strong]
If the companies buy “nonagency” loans — debt that is not backed by agencies like the Government National Mortgage Association or the Federal National Mortgage Association — then investors are subject to defaults and potential losses. On the flip side, the added risk translates to a higher yield premium.
Investors who are considering these investments believe that both the housing market and the economy are seeing healthy growth.
“This is a great environment to be a mortgage investor,” Jason Stewart, an analyst with Compass Point Research, said in the article. Stewart is leaning toward nonagency debt, despite the risks, as the investments offer greater rates and real estate prices are rising.
Mortgage REITs have gained 11.7% so far this year and come with an average 11.5% yield.
However, interest rate risk poses a potential problems. A higher interest rate translate to lower capital returns. Additionally, higher short-term interest rates would also increase mortgage REITs’ cost of funds and could cause some to lower dividends.