Capture 13.0% Yields From the World’s Most-Hated Sector
I just found one of the safest 13.0% yields I’ve ever seen — and it’s in a place practically no income investor dreams of looking right now.
In addition, I’ve found securities few American investors even know exist that are offering incredible dividend growth potential.
Believe it or not, both of these opportunities exist in the beleaguered and hated financial sector. Investors threw out the good along with the bad and the ugly during the financial crisis. But sifting through the rubble, there’s still plenty of good — if you like double-digit yields.
You see, while failing banks have captured all the headlines, certain financials actually avoided risky derivatives and multi-billion dollar write-offs. There are also companies that have kept earnings and dividends at pre-financial crisis levels. But because of their association with a hated sector, many investors simply walked away and have ignored them since.
And while some smart investors have already come back into the sector to pick the lowest-hanging fruit (In fact, Carla has been alerting her will likely lead to higher future dividends. Investing in select Canadian banks now is an ideal way to grab a piece of solid and growing payments.
I mentioned earlier that I found one of the safest 13.0% yields I’ve ever seen.
This yield comes from a type of security that’s scared most investors away — mortgage REITS. These companies invest exclusively in mortgage-backed securities.
But aren’t mortgages what got us into this mess?
Maybe so, but contrary to popular perception, business has never been better for well-positioned mortgage REITS. The government has stepped in to bolster Fannie Mae and Freddie Mac, making the mortgage-backed securities held by many mortgage REITs as safe as Treasuries.
The REITs simply borrow at short-term interest rates and invest in longer-term, higher-yielding mortgages, thus making money on the spread. With low rates on short-term borrowing, spreads are historically high.
That’s allowed REITs like Annaly Capital (NYSE: NLY), which yields 13.0%, to make high, safe payments to investors.
These securities are a dream for investing in financials. They pay regular and predictable income on a consistent basis. The beauty of these securities is that payments don’t fluctuate with the underlying company’s earnings. Market fluctuations and economic cycles are only a concern as to whether the underlying company can continue to make payments.
Preferred stocks and exchange-traded bonds of most financial institutions have managed to continue to make regular payments throughout the financial crisis. For instance, while Wells Fargo has to cut its dividend by more than -85% during the crisis, its 8.625% Trust Preferreds (NYSE: WCO) kept right on paying investors. At the height of the crisis, these securities were paying yields as high as 15% as investors fled anything related to financials. Today they still yield over 8%.
It just goes to show some of the opportunities awaiting investors in the most-hated sector of the market.
P.S. My colleague Carla Pasternak recently profiled a bank preferred stock yielding 10.1%. It’s expected to see earnings jump by +38% next year. You can read all about it here.