The highest dividend yields can be very tantalizing. As long as a stock yielding 15% doesn’t lose value, you’ll make 15% in one year! In more cases than not, however, an astronomical yield is a bad sign for a stock. Since dividend yields and stock prices move in opposite directions, a high yield usually means investors have begun to worry about the business and driven down its stock price.
Most real estate companies are organized as real estate investment trusts, or REITs. They do this so that they can get around the double taxation issue that most investors face. REITs don’t pay taxes as long as they distribute at least 90% of their income as dividends. The investor holding shares of the REIT then has to pay taxes on those dividends as though they’re income. That differs from most dividends, which are taxed at a lower rate.
Dividends aren’t guaranteed; you need to make sure a business is generating enough cash to pay its dividend, or your investment could be disastrous. So I ran a screen for the highest-yielding REITs, and the only limitation I set is they must have a market cap greater than $1 billion.
Here are the top 25 highest-yielding REITs the screen produced.
| Rank | Company Name | Market Cap (Millions) | Dividend Yield |
|---|---|---|---|
| 1 | American Capital Agency Corp. (NASDAQ:AGNC) | $12,913 | 15.20% |
| 2 | ARMOUR Residential REIT, Inc. (NYSE:ARR) | $2,345 | 14.60% |
| 3 | American Capital Mortgage Investment Crp (NASDAQ:MTGE) | $1,546 | 13.70% |
| 4 | Annaly Capital Management, Inc. (NYSE:NLY) | $14,673 | 13.30% |
| 5 | Two Harbors Investment | $4,079 | 12.60% |
| 6 | Invesco Mortgage Capital | $2,903 | 12.10% |
| 7 | Capstead Mortgage | $1,239 | 11.70% |
| 8 | Chimera Investment | $3,288 | 11.30% |
| 9 | Hatteras Financial | $2,756 | 10.20% |
| 10 | MFA Financial | $3,291 | 9.18% |
| 11 | PennyMac Mortgage Investment Trust | $1,509 | 8.94% |
| 12 | Crexus Investment Corp (NYSE:CXS) | $1,023 | 8.84% |
| 13 | Newcastle Investment | $2,902 | 7.77% |
| 14 | NorthStar Realty Finance | $1,580 | 7.65% |
| 15 | Hospitality Properties Trust | $3,321 | 7.07% |
| 16 | Government Properties Income Trust | $1,382 | 6.83% |
| 17 | American Realty Capital Properties | $2,187 | 6.37% |
| 18 | Colony Financial | $1,425 | 6.37% |
| 19 | EPR Properties | $2,353 | 6.35% |
| 20 | Omega Healthcare Investors | $3,231 | 6.33% |
| 21 | Select Income REIT | $1,059 | 6.32% |
| 22 | Spirit Realty Capital | $1,651 | 6.31% |
| 23 | Mack-Cali Realty | $2,535 | 6.27% |
| 24 | Starwood Property Trust | $3,841 | 6.26% |
| 25 | Senior Housing Properties Trust | $4,786 | 6.19% |
Source: S&P Capital IQ.
These stocks are a good place to start your research, but they’re not formal recommendations.
Let’s take a close look at the top four.
1. First up is American Capital Agency Corp. (NASDAQ:AGNC), with a trailing yield of 15.1%. American Capital Agency is a mortgage REIT, or mREIT, which invests only in securities backed by the U.S. government. These REITs borrow money and use it to buy higher-yielding mortgage-backed securities, earning the spread between the mortgage-backed securities and the cost of borrowing. The Federal Reserve has been buying up billions of mortgage-backed securities every month in an effort to push down mortgage rates. Mortgage REITs have seen the spread they earn on their mortgage-backed securities decline, as these purchases have had a major effect. mREITs have followed different strategies to cope with the declining spread.
American Capital Agency Corp. (NASDAQ:AGNC)’s strategy, like its cousin American Capital Mortgage, is run by CIO Gary Kain. Last year before the Fed announced its third round of quantitative easing, Kain laid out the company’s strategy, which expected that QE3 would happen and that the Treasury Department would buy up mortgage-backed securities, pushing down rates and boosting refinancings. To protect itself, the mREIT bought mortgage-backed securities with low loan balances and those that had previously been refinanced, lessening the risk of prepayment. QE3 did indeed happen, and American Capital Agency Corp. (NASDAQ:AGNC) profited from its strategy.
The company recently did a secondary offering of 50 million new shares at a little over $30 per share. While some analysts were worried that the secondary offering would dilute existing shareholders, the offering comes at a time when American Capital Agency has been able to take advantage of the dollar roll market to keep its interest-rate spread wider than those of its competitors. As of the end of the fourth quarter, the company now has a leverage level of 7 and an interest-rate spread of 1.39%. While insiders are buying shares, investors in American Capital Agency Corp. (NASDAQ:AGNC) should be confident in the company’s strategy and the risks that a continued QE3 or a rise in interest rates present going forward.
