Analyst Has Two Solid Dividend Yields Averaging 10%

A research report came out on Monday, when many investors were still out enjoying an extended Fourth of July holiday, talking up two of the key mortgage real estate investment trusts (REITs). Sterne Agee’s Jason Weaver sees an opportunity in mortgage REITs in low-growth environment. What makes this call so interesting is that it came at a time when almost everyone in the world is expecting interest rates to rise in the next year or two. Still, these yields currently screen out with an average of about 10% between the two picks.

Weaver’s approach acknowledges some of the perceived issues. He called these unloved and ignored, but believes that the mortgage REITs still offer compelling upside following a premature temper tantrum of 2013. His take: Buy MFA Financial Inc. (NYSE: MFA) with a 9.8% yield and Two Harbors Investment Corp. (NYSE: TWO) with a 10.1% yield.

There is one thing that stands out handily about the defense of this sector: the price targets offer only the huge yields as the implied upside. MFA Financial is at $8.09 and the Sterne Agee target is $8.25, versus a consensus price target of $8.34. Two Harbors Investment now trades at $10.28 and Sterne Agee’s target is $10.25. Where the firm’s price targets make up for this is in the June 30 implied book value estimates. MFA’s projected book value in this call is $8.44 (a 4% discount) and Two Harbors’ projected book value was up at $10.95 (a 6% discount).

The call at Sterne Agee is that it is simply too early to call the relief rally over. Weaver and his team’s report said:

Despite the impressive rally in MREIT shares to date following the tumultuous decline of 2013, the sector has further to go in our view. Price/Book ratios remain well south of their historical medians even in comparable periods of heightened interest rate volatility, and dividend yields now appear far more sustainable and attractive versus comparable asset classes.

ALSO READ: 13 Analyst Stocks Trading Under $10 With Massive Upside

Another take is that the technical conditions still favor a contrarian bullish outlook for mortgage REITs. Retail investor ownership of the sector has declined and most institutional investors remain underweight — and reluctant to fill the void. The short interest in the mortgage REITs is also called “stubbornly high even as earnings power has stabilized.” The firm’s assessment suggests that current market valuations for the group are implying overly negative outcomes than even the most sharply rising interest rate forecasts might produce.

Other drivers are that sector inclusion is attractive for equity portfolios modest growth outlook. Also, a change in industry dynamic remains unappreciated in the outlook.

Lastly in the call, last month’s FHFA announcement that it would impose a moratorium on new captive insurers’ applications to become members of the FHLB was certainly disappointing but the firm is reminding clients that thus far several REITs (these two included) have already become active members in the system.

ALSO READ: Eight Housing Markets at All-Time Highs

Take This Retirement Quiz To Get Matched With A Financial Advisor (Sponsored)

Take the quiz below to get matched with a financial advisor today.

Each advisor has been vetted by SmartAsset and is held to a fiduciary standard to act in your best interests.

Here’s how it works:
1. Answer SmartAsset advisor match quiz
2. Review your pre-screened matches at your leisure. Check out the
advisors’ profiles.
3. Speak with advisors at no cost to you. Have an introductory call on the phone or introduction in person and choose whom to work with in the future

Take the retirement quiz right here.

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.