Secondary Offering & Dividend Fluctuations Underscore Mortgage-REITs (IVR, NLY, CIM, CMO, CYS)

Invesco Mortgage Capital Inc. (NYSE: IVR) has two things to address today, a super-high dividend yield and a secondary offering.  This also spills over to the outlook for Annaly Capital Management, Inc. (NYSE: NLY), Chimera Investment Corporation (NYSE: CIM), Capstead Mortgage Corporation (NYSE: CMO), and Cypress Sharpridge Investments, Inc. (NYSE: CYS).  Welcome to the world high-risk and high-dividend mortgage REITs.  Opportunity, and risks, await.

Invesco Mortgage Capital Inc. (NYSE: IVR) priced a 17 million share secondary offering of its common stock at a public price of $20.15 per share.  This has sent shares down 1.3% to $20.72 today on very active trading volume.  Earlier this month it declared a quarterly dividend of $0.97 per share, but investors should know that the last two dividends have rotated from $0.97 to $1.00 and the payout was far lower last year.  On a constant-payout basis today, the $20.72 price generates a dividend yield of about 18.7% and the 52-week trading range is $19.25 to $24.07.

Annaly Capital Management, Inc. (NYSE: NLY) is often considered “the safest” of the mortgage REITs, an honor or claim that we will leave up to you to decide.  It recently declared a $0.65 dividend, which is slightly higher than the prior two payouts but lower than during the middle of 2010.  ON a constant-payout basis, its $18.60 price and the $2.60 annualized basis translates to a dividend yield of about 13.9%.  Its 52-week trading range is $16.73 to $18.61.  Please note, that is a 52-week high TODAY!

Chimera Investment Corporation (NYSE: CIM) is considered the vulture mortgage REIT by the Annaly team and it has often raised capital to buy more securities in secondary offerings.  Its most recently declared quarterly dividend of $0.13 is one which has been lower compared to prior quarterly payments of $0.14, $0.17, $0.18, and $0.17.  On a constant-dividend basis based upon the newer payout, the $3.52 price today generates an implied dividend yield of about 14.7% and its 52-week trading range is $3.37 to $4.36.

Capstead Mortgage Corporation (NYSE: CMO) recently declared a quarterly payout of $0.48 per share. This was a higher payout than we have seen in each of the last four quarters: $0.41, $0.39, $0.26, and $0.36… It is also lower than what was seen in 2009.  Capstead’s constant-dividend implied yield today at $13.88 would come to about 13.8%.  Its 52-week trading range is $10.69 to $13.94 and that $13.94 high was hit TODAY!

Cypress Sharpridge Investments, Inc. (NYSE: CYS) recently declared a quarterly payout of $0.60 per share earlier this month for the fifth consecutive quarterly payout of that amount.  At $12.52 today, Cypress Sharpridge pays a 19.1% dividend yield.  Its 52-week trading range is $11.89 to $14.57.

Investing in real estate investment trusts can be tricky because dividend rates can change so frequently.  Investors also have a hard time predicting which of the trusts will have higher earnings ahead.  Mortgage-REITs are just REITs that invest in mortgage securities and still pay out at least 90% of their income as dividends to shareholders.  The reason you see so many secondary offerings in the sector is because REITs pay out almost of their income rather than using capital for growth.  Another, and less popular argument, is that secondary offerings often can help to bolster dividends or stabilize dividends during more volatile quarters.

Investors are drawn to high dividends.  When you see double-digit percentage dividends when short-term Treasury yields are under 1%, what do you think it tells you about the risk profiles of this class?  As always and with all investment strategies, “Understand what you are investing in.”

QE2 is effectively ending and the calls for higher rates have gone on long enough that it has almost been an entire historic rate cycle of an easing to a tightening bias.  Stay tuned.

JON C. OGG