Dividends – A Dividend I’m Buying Now
The Dynamic Wealth Report
September 28, 2009
The Dividend I'm Buying Today!
I’m always getting questions from readers asking what I’m buying. It
seems everyone wants to know what I’ve bought, what I’m looking at, and
how I do my research.
Well, today I’m going to answer a few of those questions.
I’m going to tell you exactly what I’m buying this week. But first, let
me walk you through some of my research on the subject.
Last week the Federal Reserve had its monthly monetary policy meeting.
They discuss stuff like interest rates, the liquidity they’re injecting
into the economy, and even inflation. After the meeting, they put out a
statement announcing their thoughts on the economy.
Last week’s meeting didn’t produce anything new.
The Fed’s announcement wasn’t very interesting to me, except for one
small part. Mortgage-backed security purchases. It sounds complex, but
here’s what you need to know.
After the lending market for real estate froze up, the Fed stepped in
and started buying mortgage-backed securities. A mortgage-backed
security, or MBS, is an asset-backed security which gets cash flows from
mortgage loans, typically on residential property.
So if you’ve bought a house in the last year or so, there’s a good
chance the Fed owns your mortgage.
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Right now they account for 80% of all mortgage-backed security
purchases. You can see why it’s important to know what they’re going to
do.
That’s why I read with interest the Fed would be slowly limiting their
purchases of mortgage-backed securities. It’s going to have a huge impact on mortgage interest
rates. As the Fed slows down purchasing, we’ll see mortgage interest
rates rise.
That’s when I started wondering, “Who’s going to benefit from rising
mortgage interest rates?”
I think REITs buying mortgage-backed securities will see a jump in
profits. You see, their business is simple. They borrow money very cheaply
and use the proceeds to buy mortgage-backed securities, which pay a
higher interest rate.
The Mortgage REIT gets to keep the spread. So, if they borrow at 1% and
buy an MBS paying 5%, they keep the difference… in this case 4%.
Now I know it doesn’t sound like a lot. However, the Mortgage REITs can
do this simple transaction over and over again. Some portfolios are in
the billions and tens of billions of dollars! As mortgage rates rise,
they stand to make even more money!
Let’s take a closer look at these Mortgage REITs.
There are a number of them to choose from. You could just buy them all,
but most people don’t have that much money. So let’s take a closer look
and try to find the best one.
The first company I’m looking at is Anworth Mortgage (ANH). They have a
market cap over $850 million and are paying a dividend of 16%. That’s a
sweet yield. Let’s dig a little deeper. They have a payout ratio of
136%. That’s a big red flag.
If you don’t know, the payout ratio is how much of a company’s earnings
are being paid out in dividends. In the case of Anworth, they are paying
out more in dividends than they’re bringing in. I’m thinking this
dividend might get cut.
Let’s look at a few others.
Capstead Mortgage (CMO) has a $960 million market cap. They’re paying a
huge dividend too… 14%. Looking at the payout ratio, I see another red
flag. Their ratio is 104%... still too rich for my blood.
The next company is Hatteras Financial (HTS). Their market cap is over
$1.1 billion and they’re paying a 14% dividend. Their payout ratio is
95% - it’s still high, but better than the other two. Let’s take a
closer look.
Here’s another red flag… nobody’s buying the stock. With prices as low
as they are, you’d think management would be jumping in with both feet. Not at this company… management ownership is abysmal.
Then I started looking at MFA Financial (MFA). MFA’s been on a nice
uptrend over the last few months and they’re trading right around $8 a
share. They have a $1.8 billion market cap and are paying a huge 12%
dividend yield. Their payout ratio is 83%. It’s not the greatest, but
it’s not bad either.
Looking at insider holdings, I get a warm and fuzzy feeling. Back in May,
management started buying the stock on the open market. They weren’t
just exercising options, they were using their own money to buy the
stock. Talk about a huge vote of confidence.
I did some more research, looked at their SEC filings, and reviewed old
press releases. I liked what I read.
I think MFA has a bright future ahead of it, and I’m planning on adding
them to my portfolio this week. Take a look for yourself. You’ll see
what I saw. Don’t wait too long on this stock… its set to rally soon.
• Gambling Industry (Up 10%)
The Gambling Industry has been moving steadily higher as consumer
confidence has returned. Now that the threat of a global depression is
passed, consumers are feeling more confident… and becoming more likely
to travel and visit casinos.
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