Capstead Mortgage Corporation (CMO), American Capital Agency Corp. (AGNC): Chase These mREITs

The company offers an impressive dividend yield of 18.6%, on its quarterly shareholder distribution of $1.05 per share. It’s fair to believe that this quarterly distribution is sustainable as its four quarter average cash dividend coverage ratio comes out to be 1.55 times. This means, it is generating 1.55 times more cash than is required in dividends. Also, it means that the company can tolerate some spread contractions before a dividend cut is evident. Analysts have a consensus mean target of $25.47 for the stock that is currently trading at $22.59 per share. This gives the stock upside potential of 12.75% and a massive total return of 31.4%.

Diversification benefits

This was evident when it reported its second quarter results with 7.4% sequential decline in the book value, coupled with a 6 basis point increase in the net interest rate spread. Lower book value decline and higher earnings during the quarter were a direct result of the diversification provided by the company’s investment portfolio.

The stock currently offers a dividend yield of 11.13%, and its quarterly dividend rate is $0.28 per share. The company has a relatively weak four-quarter cash dividend coverage ratio of 0.93 times. However, an expanding net interest spread offsets this concern. The stock is currently exchanging hands at $7.91 per share and offers upside potential of 9.1%. This makes the total return potential to come out to 20.23%.

Conclusion

While chasing the mortgage REITs’ elevated dividends yields, you must be certain that any capital depreciations don’t offset the benefits of these elevated yields. I believe MFA Financial, Inc. (NYSE:MFA), American Capital Agency Corp. (NASDAQ:AGNC) and Capstead Mortgage Corporation (NYSE:CMO) offer sustainable dividend yields. Analysts believe they have the potential to provide capital appreciation for the aforementioned reasons. So, I am bullish on these stocks.

The article Chase These mREITs originally appeared on Fool.com and is written by Adnan Khan.

Adnan Khan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Adnan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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