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Merrill Lynch's 4 Double-Digit High-Yielding Mortgage REITs to Buy Now

With the end of third round of the Federal Reserve’s quantitative easing program, many investors wondered who, if anybody, would pick up the slack in buying mortgage-backed and Treasury securities. The interesting answer is that many of the major banks may pick up the buying load, as they are now required to keep very safe and liquid capital. With many investors looking for high-yield opportunities, the solid mortgage real estate investment trusts (REITs) that have had interest rate increases priced in look good now, especially with bank buying supporting liquidity and pricing. A new report from Merrill Lynch highlights some of the top companies to buy.

We screened the Merrill Lynch list of top mortgage REITs to buy where the analysts’ core earnings estimates for 2015 were higher than Wall Street consensus expectations. Remember, distributions from mortgage REITs can contain return of principal.

Ellington Financial LLC (NYSE: EFC) slightly missed third-quarter earnings estimates, but the Merrill Lynch team points out the company has proven to be a very capable manager, given a very stable dividend history and solid book value stability over the years. In fact, the analysts like the company even in a scenario of volatile interest rates, which may or may not even occur.

Ellington investors are paid a gigantic 14.2% distribution. The Merrill Lynch price target is $26, and the Thomson/First Call consensus target is $25.50. Shares closed trading on Monday at $21.69.

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Invesco Mortgage Capital Inc. (NYSE: IVR) is a company that may make good sense for investors looking for a big-name money manager at the helm of the REIT. Invesco focuses on financing and managing residential and commercial mortgage-backed securities and mortgage loans. Invesco Mortgage Capital is externally managed and advised by Invesco Advisers, a subsidiary of Invesco Ltd., a leading independent global investment management firm based in Atlanta.

Invesco Mortgage Capital investors are paid a 12.3% distribution. The Merrill Lynch price objective is $18, and the consensus target is slightly higher at $18.34. Shares closed on Monday at $16.30.

Two Harbors Investment Corp. (NYSE: TWO) had a slight earnings miss, but the book value increased, and the Merrill Lynch analysts think that the company’s diversified portfolio and move to a more defensive posture on rates makes it a top real estate name to buy in 2014 and beyond. While it may not have the potential upside other mortgage REITs, it might prove a better choice for more volatility shy income accounts.

Two Harbors investors are paid a 10.1% distribution. The Merrill Lynch price target is $10.50, and the consensus was not available. Shares closed at $10.28.

Western Asset Mortgage Capital Corp. (NYSE: WMC) like the others, also had a slight miss on the third-quarter numbers, but the Merrill Lynch analysts feel that the story is still well intact. In fact, the company just raised the payout in the third quarter, so the analysts feel that with the book value stable, the valuation should be well supported going into 2015. The shares also held their own after the results, which bodes well going forward.

Western Asset investors are paid a mammoth 18.8% distribution. The Merrill Lynch price target is $15.50, while the consensus target is lower at $14.75. The shares closed higher than that on Monday at $15.07.

ALSO READ: Merrill Lynch Sees Optimism for Big Banks Heading Into 2015

The mortgage market can be very volatile, and big interest rates swings could affect these investments. Therefore they are not suitable for conservative accounts designed to protect principal. However, for patient aggressive income accounts, the risk-reward is well-balanced, with future interest rate moves noted by the market.

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