2. Second up is ARMOUR Residential REIT, Inc. (NYSE:ARR), with a trailing yield of 14.20%. ARMOUR Residential REIT, Inc. (NYSE:ARR) invests in hybrid adjustable-rate, adjustable-rate, and fixed-rate residential mortgage-backed securities that are backed by the U.S. government. As of the end of February, the company now has a leverage level of 9 and an interest rate spread of 1.39%. ARMOUR has been challenged recently by QE3, with the company’s constant prepayment rate rising to an annualized high of 19.1% in January, though it has since come back down to 11.1%.
ARMOUR holds roughly $2 billion in adjustable-rate mortgages and the rest in fixed-rate securities. The company has hedged almost 40% of its portfolio’s interest-rate exposure. As long as QE3 continues, ARMOUR Residential REIT, Inc. (NYSE:ARR)’s interest-rate spread is likely to continue to decline, which will probably mean a falling dividend.
3. Third is American Capital Mortgage Investment, with a trailing yield of 13.7%. American Capital Mortgage follows the same strategy as its cousin American Capital Agency Corp. (NASDAQ:AGNC), but it invests in both agency-backed and non-agency-backed securities, while American Capital Agency is restricted to government-backed securities. As of the fourth quarter, the company has a leverage level of 6.7 and an interest-rate spread of 1.88%.
4. And finally, we have Annaly Capital Management, Inc. (NLY), with a trailing yield of 13.3%. Annaly invested solely in agency mortgage-backed securities, though that has changed with the company’s acquisition of Crexus, its cousin that invests in commercial real estate. Annaly’s CEO has said that after the acquisition it will invest up to 25% of its equity in real estate assets other than agency mortgage-backed securities.
QE3 has been a challenge this year for Annaly, with a high constant prepayment rate of 19% and a steadily declining interest-rate spread, which was most recently at 0.95%, a hefty drop from last year’s 1.71%. With the declining spread, analysts and investors turned on the stock and sold it off to below book value. Annaly took advantage of the drop in its share price and bought back 27.8 million shares in the fourth quarter at an average price of $14.28.
While Annaly faces multiple risks going forward, with a new strategy set to take effect, it will be interesting to watch what happens.
Foolish bottom line
Remember, these REITs’ seemingly irresistible yields could be ticking time bombs, so do your own due diligence. Also make sure you diversify your picks across various sectors. As investors relearn every decade or so, you never want to put all your eggs in one basket — no matter how tempting the dividends are.
The article The 25 Highest-Yielding REITs in March originally appeared on Fool.com and is written by Dan Dzombak.
Find Dan Dzombak on Twitter, @DanDzombak, or on his Facebook page, DanDzombak. He and The Motley Fool own shares of Annaly Capital Management.
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