Company insiders should be strongly resistant to buying shares, since it increases company-specific risk rather than diversifying their wealth. Therefore, insider purchases should signal confidence in the company, and it turns out that stocks bought by insiders- particularly multiple insiders- to outperform the market on average (see our analysis of studies on insider trading). Real estate investment trusts often pay high dividend yields, since these companies are required to distribute a large share of taxable income to shareholders in order to preserve their preferential tax status. As a result, they are often popular among income investors. We have gone through our database of insider trading filings and here are five real estate investment trusts which multiple insiders have purchased in the last three months:
$52 billion market cap Simon Property Group, Inc (NYSE:SPG), a large owner of shopping malls, had two insiders buy shares in early March including one who purchased over 1,600 shares at prices of about $160 per share. Simon Property Group, Inc (NYSE:SPG) pays a dividend yield of 2.8%- lower than many residentially focused REITs, but also less dependent on residential mortgage backed securities. While Simon Property Group, Inc (NYSE:SPG) has had to reduce its quarterly payments at times, it currently pays out more cash per quarter than it did in the mid 2000s. The stock is up over 70% in the last five years, easily outperforming broader market indices.
Several Board members and company officers have reported buying Two Harbors Investment Corp (NYSE:TWO), another real estate investment trust with a focus on residential mortgage backed securities. The most recent dividend payment at Two Harbors Investment Corp (NYSE:TWO) was 32 cents per share, which when annualized generates a yield of over 10%. However, this payment was a substantial cut from the previous quarter. SAC Capital Advisors, managed by billionaire Steve Cohen, initiated a position of over 4 million shares between October and December (find Cohen’s favorite stocks).
Three Board members were buying shares of ARMOUR Residential REIT, Inc. (NYSE:ARR) in the middle of March. Armour pays a dividend yield of 13%, but its monthly payments have actually been coming down and it’s possible that going forward investors would receive a lower yield on any investment they make today. The company- like many high yielding REITs- is also risky in terms of its type of business, with Armour investing in mortgage backed securities. It also has a limited operating history, having only been formed in 2007.
Two insiders at American Capital Mortgage Investment Crp (NASDAQ:MTGE) were buying in February at prices close to $26 per share. This is another company with a high dividend yield, but the stock has only been publicly traded since August 2011 (it is up over 40% from its levels at that time). American Capital Mortgage Investment Crp (NASDAQ:MTGE)’s investments include residential mortgage-backed securities, commercial mortgage loans, and mortgage related derivatives. Brian Jackelow’s Sab Capital Management reported a position of 2.5 million shares as of the end of December (see Jackelow’s stock picks).
Newcastle Investment Corp. (NYSE:NCT), a $2.8 billion market cap diversified real estate investment trust, has also been having insiders increase their stake. Newcastle suspended its dividend payments during the financial crisis; the company has been increasing payments since it resumed the quarterly dividend in mid 2011 but the payments are still well below pre crisis levels. Still, with the stock price down over 50% from the middle of 2007 the dividend yield is 8%. The stock is up 82% in the last year on the strength of the real estate market.
Income investors should not commit too much of their portfolio to REITs, particularly residential focused REITs; while the yields are high, a shock to the housing market might cause financial performance- and, by extension, dividend payments- to decline or even be halted as we saw occur during the financial crisis. If the portfolio is firmly grounded in more established businesses, however, it may be worth the risk to include a small number of higher-yield investments to boost the average dividend yield.
Disclosure: I own no shares of any stocks mentioned in this article.
