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How to Get a 20% Dividend Yield with Monthly Payments

If you are an income investor seeking high yield with monthly income, then MORL may be a nice addition to your portfolio. I have invested in mortgage REITs like Annaly Capital, AGNC and others in the past to boost my income stock portion of my portfolio. With MORL, you get a basket of mortgage REITs with a 20% dividend yield with monthly income!

The UBS ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN (MORL) has a trailing 12-month dividend yield of 20.6% as of this week’s close. Since dividend yields are crucial to some market participants, investors may be highly attracted to the exchange-traded note (ETN). Although MORL consistently offers high dividend yields in double digits and sometimes above 20%, there is one primary reason that it is able to offer captivating dividend payouts (currently, $2.99).

Nomura has started coverage of 10 US Mortgage REITs, with seven stocks assigned an initial investment rating of buy. “The environment for levered mortgage-based operating models is the best it’s been since the Taper Tantrum,” Nomura said in a note to clients, with the industry attracting “yield-starved investors amid a low, range-bound interest rate environment and expected yield curve steepening.” Nomura expects companies in the space to record better net interest spreads and “incrementally higher leverage.” It gave Annaly Capital Management Inc.(largest MORL holding

) a 2019 earnings-per-share estimate of $1.30 and a price target of $11. Annaly recently closed at $9.99.

MORL was issued on Oct. 16, 2012, and is legally structured as an uncollateralized debt instrument. Therefore, the ETN carries credit risk, which relies on the credit worthiness of UBS, and any of the payments made on MORL depend on the ability of UBS to satisfy its debt obligations. The ETN has an annual net expense ratio of 0.40%, which is over 50% below the average of its category of trading leveraged equity.

MORL seeks to provide investment results corresponding to two times the monthly performance of the MVIS Global Mortgage REITs Index, its underlying index. It was the first product of its kind to offer two times leverage in the mortgage REIT industry. Since the ETN is a monthly leveraged product, MORL aims to provide twice the monthly price and yield performance of its underlying index.

The mortgage REIT industry is known for its high dividend payout ratio and deriving its earnings by purchasing mortgage-backed securities (MBS) or lending money to individuals purchasing real estate. Mortgage REIT companies are able to borrow at a lower rate, close to the target federal funds rate, and they should invest the money in MBS or lend it to consumers. Consequently, the increased borrowing allows mortgage REIT companies to generate higher earnings and pay out attractive dividends.

The ETN pays out dividends to its holders on a monthly basis, which also attributes to its high dividend yields. However, the dividend is bigger in the final month of each quarter, which ends in January, April, July and October; during the two months in between the large quarterly dividend payments, it pays a smaller dividend.

The ETRACS Monthly Pay 2xLeveraged Mortgage REIT ETN due October 16, 2042 (the “Securities”) is a series of Monthly Pay 2xLeveraged ETRACS linked to the MVIS US Mortgage REITs Index (the “Index”). The Index tracks the overall performance of publicly-traded mortgage REITs that are listed and incorporated in the United States and derive at least 50% of their revenues from mortgage-related activities. The Securities are senior unsecured debt securities issued by UBS AG (UBS). The Securities provide a monthly compounded two times leveraged long exposure to the performance of the Index, reduced by the Accrued Fees. Because the Securities are two times leveraged with respect to the Index, the Securities may benefit from two times any positive, but will be exposed to two times any negative, monthly compounded performance of the Index. The Securities may pay a monthly coupon during their term linked to two times the cash distributions, if any, on the Index Constituent Securities. You will receive a cash payment at maturity, upon acceleration or upon exercise by UBS of its Call Right based on the monthly compounded leveraged performance of the Index less the Accrued Fees, calculated as described in the accompanying product supplement. You will receive a cash payment upon early redemption based on the monthly compounded leveraged performance of the Index less the Accrued Fees and the Redemption Fee, calculated as described in the accompanying product supplement. In addition, for any Securities it sells, UBS Securities LLC may charge purchasers a creation fee, which may vary over time at UBS’s discretion. If the creation fee is applicable, the return on your investment in the Securities will be reduced by the creation fee. Payment at maturity or call, upon acceleration or upon early redemption will be subject to the creditworthiness of UBS. In addition, the actual and perceived creditworthiness of UBS will affect the market value, if any, of the Securities prior to maturity, call, acceleration or early redemption.

The MVIS US Mortgage REITs Index is a modified capitalization-weighted, float-adjusted index designed to give investors a means of tracking the overall performance of publicly-traded mortgage REITs that are listed and incorporated in the United States and derive at least 50% of their revenues from mortgage-related activity. This includes companies or trusts that are primarily engaged in the purchase or service of commercial or residential mortgage loans or mortgage-related securities, which may include mortgage-backed securities issued by private issuers and those issued or guaranteed by U.S. Government agencies, instrumentalities or sponsored entities.

The Index is a price return index (i.e., the reinvestment of dividends is not reflected in the value of the Index). As of September 13, 2017, the Index was comprised of 25 Index Constituent Securities, with the largest Index Constituent Security weighted at 14.22% and the smallest Index Constituent Security weighted at 1.22%. The top ten constituent stocks of the Index as of September 13, 2017, by weighting, are listed in the table below:

 

Company Ticker Listing Country Index Weighting
Annaly Capital Management Inc. NLY US 14.22%
AGNC Investment Corp. AGNC US 8.58%
Starwood Property Trust Inc. STWD US 6.58%
New Residential Investment Corp. NRZ US 5.97%
Chimera Investment Corp. CIM US 5.06%
Blackstone Mortgage Trust Inc. BXMT US 4.95%
Two Harbors Investment Corp. TWO US 4.91%
MFA Financial Inc. MFA US 4.68%
Invesco Mortgage Capital Inc. IVR US 4.60%
Apollo Commercial Real Estate Finance, Inc. ARI US 4.34%
TOTAL 63.89%

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Best Dividend Stocks for 2012 – Mortgage REITs

Attractive Returns to Continue, Prefer Non-Agency REITs

Prefer non-Agency: Heading into 2012 we think that the hybrid/non-Agency REITs generally offer more attractive value with the potential for more capital appreciation plus a more stable dividend outlook given the attractive reinvestment environment.

TWO remains top pick: Against this framework Two Harbors remains our top pick among the mortgage REITs.  The company has been opportunistically adding to its non-Agency position at incrementally accretive risk-adjusted yields.  This combined with the Agency portfolio with favorable prepayment characteristics gives us confidence in the sustainability of the current 16.8% yield.

Agency MBS: While the net interest spread opportunity in the Agency MBS space contracted during 2011 the returns remain attractive by historical standards.  In addition the reduced uncertainty around the prepay environment, specifically government actions, should make for a more predictable return path than in 2011.

Non-Agency MBS: In 2012 we continue to see the spread environment remaining attractive on a risk-adjusted basis with incremental spreads higher than the existing realized spreads.  It is more challenging to know how the securities will perform on a mark to market basis, which will be dependent on the broader
market risk appetite over the short-term.

Capital Raising: Given the attractive level of returns we see that the mortgage REITs will continue to have an appetite to raise additional capital.  The current gating factor is stock prices; current valuations would generally not allow the mortgage REITs to raise new stock at a price below book value.  We see the need for 6-7% premium in the group for offerings to become more likely.

Valuation: The relationship between price to book and ROE is less correlated today than it has been in the past as investors are putting a greater premium on safety versus returns.  This results in higher price to book multiples for the Agency REITs versus the broader group of hybrids.

The table below displays the mortgage REITs with the highest equity score (compellation of analyst opinions with 10 being Very Bullish).

Mortgage REITs for 2012, getrichinvestments.com

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Dividends from High Quality, High Yield Stocks

With so many companies being affected by the financial crisis, it’s important for income investors to find dependable dividend payers that they can count on. With projections for a slower growth economy amid historically low interest rates, it’s now more important than ever to find these solid dividend paying companies as there are fewer places to turn to for high yielding investments without taking on unwelcomed risk.  By screening for stocks with market beating yields, double digit growth rates, above median increasing cash flows and a strong balance sheet, this screen seeks to do just that by finding those companies that could turn into long-term core holdings for an income producing portfolio.

If you have not heard of TWO, then take note as this is a 9 on a 10 point scale.  Two Harbors Investment (TWO) is a holding company. The company operates as a real estate investment trust focused on investing in, financing and managing residential mortgage-backed securities (RMBS), and related investments. The company is externally managed and advised by PRCM Advisers LLC. The company’s target assets include the following: Agency RMBS, Non-Agency RMBS, and Financial assets other than RMBS, which include asset-backed securities and certain hedging transactions.

TWO is trading at $9.23 with a high dividend yield of 17%.  Yes, yields this high are scary but TWO is similar to Annaly as a mortage REIT.  EPS increased from $1.09 to an estimated $1.43 over the past 5 quarters indicating an improving growth rate. Analyst forecasts have recently been raised.  Company recently reported better than expected results.

Screening Criteria:
Dividend Yield Greater than or Equal to 5.00%; EPS Growth (Proj this Yr vs. Last Yr) – Greater than or Equal to 10.00%; P/E (This Year’s Estimate)Less than or Equal to 20.0; Cash Flow Growth Rate (TTM vs. Prior TTM) Greater than or Equal to 0.06%; Interest Coverage (Most Recent Qtr) Greater than or Equal to 3.0x; Security Price Greater than or Equal to $5.00.

 

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List of High Quality, High Yield Dividend Stocks

We have a new list of high yield dividend stocks that are also filtered by being high quailty stocks.  The filters are shown in the table below.  These stock criteria include a buy or hold rating from Zacks Research, a projected EPS of 10% or greater, cashflow growth rate of 0.06% or greater, etc.

 Zachs
Research
Is Rated Buy or Hold
Dividend Yield Greater than or Equal to 5.00%
EPS Growth (Proj this Yr vs. Last Yr) Greater than or Equal to 10.00%
P/E (This Year’s Estimate) Less than or Equal to 20.0
Cash Flow Growth Rate (TTM vs. Prior TTM) Greater than or Equal to 0.06%
Interest Coverage (Most Recent Qtr) Greater than or Equal to 3.0x
Security Price Greater than or Equal to $5.00
Volume (90 day Average) Greater than or Equal to 50.0K

 

The list of stocks passing this hurdle are shown in the graph below.  The most impressive stock is Two Harbors (TWO) which sports an 18% yield due to a recent price decline.  TWO has NO long-term debt which is great for a REIT and is rated a strong buy by many analyst,  Here is a detailed company description:

Two Harbors Investment Corp. (TWO) is an real estate investment trust (REIT), which focuses on investing in, financing and managing residential
mortgage-backed securities (RMBS). The Company focuses on investing in the asset classes, which includes agency RMBS, non-agency RMBS and financial assets other than RMBS, consisting of approximately 5% to 10% of the portfolio. Two Harbors is externally managed and advised by PRCM Advisers LLC. Capitol Acquisition Corp. (Capitol) is a wholly owned indirect subsidiary of Two Harbors. On October 28, 2009, Two Harbors Merger Corp., a wholly owned subsidiary of the Company merged with Capitol.

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