Posted on May - 23 - 2010

The Best Place for Earning 12% Dividends Now

This may sound odd, but I am suspicious of high dividend yields…

In the role of a professional dividend stock analyst, I frequently screen the stock market in support of high-yield dividend stocks. My searches mostly bring plenty of results. Currently, for instance, 95 stocks are yielding above 10%.

These dividend yields seem awesome until I check out the businesses behind them. But they are generally waste. The high returns means the stock value has in recent times dropped or the dividend payment is about to drop… or both.

In other words, I usually consider high dividend yields the similar way I would treat a colourful snake: I steer clear.

That said, there are for all time exceptions to the rule. Through the years, I’ve been capable of find pockets of rock-solid high-yield stocks dumped in the garbage. In recent times, I found one of those “pockets” in the mortgage industry…

There are two different sorts of mortgages.
1. Agency Mortgages: The mortgages insured by government.
2. Nonagency Mortgages: These mortgages do not have government back up and these are issued by private lenders like banks or mortgage companies.

In past three years, investors who invested their money in nonagency mortgages have lost trillions of dollars. The recession has made it much difficult for the property owners to make their monthly mortgage repayments. Non-Payment, delinquencies as well as foreclosures have increased like anything. The investors who invested their money in these mortgages have lost their fortunes because there is no security from a government guarantee.

Mortgages have made big losses for the investors who touched them in the last 10 years.  They’re the final investment preference that you would consider buying if you are planning for investment. I’ll be of the same opinion with you, furthermore leave them with the rest of the useless items my screens turn up.

Typically, I’d have the same opinion with you. But look at this for a while.

TransUnion is a 3rd largest consumer credit reporting bureau in the United States, which offers credit-related information to potential creditors. Every month, TransUnion measures the number of mortgages which have gone 60 days or more without the borrower making a repayment.

In respect to the latest research report from TransUnion, the 60-day failure rate for the entire mortgages dropped this month for the first time in last three years, from 6.89% to 6.77%.

One of the basics of making money in the stock market is to buy when things move from bad to less bad. Moreover that’s what happening in the mortgage market right now. A smaller number of individuals are defaulting on their loans for the first time.

The market is turning around. It is a good opportunity to purchase nonagency mortgages, even if they stink.

Mortgage Real Estate Investment Trusts (REIT) are stock market instruments that focus in investment in mortgages. Nonagency mortgages remain transacting, on average, around 70 cents on the dollar. The handful of mortgage REITs that make investments in nonagency mortgages are trading like junk bonds and paying out 12%-18% dividends.

As lesser quantity home owners failure to pay on their mortgages, mortgage REITs should be capable to make more profits and pay bigger dividends. As other investors realize mortgage REIT dividends are sustainable, they’ll push up the stock prices, providing you with capital gains, too.

In short, the mortgage market is moving from “bad” to “less bad” and it’s giving us a rare opportunity to receive a secure, high profits stream in the mortgage REIT industry.

 

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