4 MREITs Yielding Over 8%

 | Sep 01, 2021 05:19AM ET

"Regular" REITs typically buy physical properties, find someone to manage them, and lease them out. They collect rent checks and avoid paying taxes on most of these profits if they distribute 90% of their profits as payouts. This is the reason REIT stocks typically boast big yields.

Mortgage REITs (mREITs), on the other hand, don’t own buildings. They own paper. Specifically, they buy mortgage loans and collect the interest. How do they make money? By borrowing “short” (assuming short-term rates are lower) and lending “long” (if long-term rates are, as they tend to be, higher).

This business model prints money when long-term rates are steady or, better yet, declining. When long-term rates drop, these existing mortgages become more valuable (because new loans pay less).

Of course, the traditional mREIT’s gravy train derails when rates rise and these mortgage portfolios decline in value. Historically, rising rate environments have been very bad for mREITs and resulted in deadly dividend cuts.

For example, Annaly Capital (NYSE:NLY) investors took it on the chin during the rate hike cycle from June 2004 to June 2006, when Alan Greenspan boosted rates from 1% to 5.25%. Everyone knew higher rates would be problematic, but NLY investors didn’t run for the exits until after it chopped its payout in mid-2005.

Of late, NLY has made efforts to hedge its portfolio from rising rates. The firm always pays a huge dividend—the shares yield 10.1% as I write—but stock price declines weigh on total returns. So, over the past decade, the stock is up only 60% and due only to the dividends. Not awful, but these returns don’t even add up to that stated payout.

h2 Overpromising Payouts