Mortgage REIT work very differently than REIT stocks that most people are familiar with. Instead of investing in income-generating real estate, mortgage REITs invest in loans secured by real estate. Most mortgage REITs do this by using low-interest-rate short-term debt to invest in long-term mortgages that pay off at a higher rate and profit from the yield spread.
The risks associated with the REIT mortgage business model became apparent last year when some of them received margin calls on short-term debt that they were struggling to pay off.
However, risk often comes with high returns, as mortgage REITs tend to pay some of the highest dividends. These three mortgage REITs have rebounded well over the past year and offer dividends in excess of 10%.
Capital of Orchid Island (NYSE: ORC)
Orchid Island Capital primarily invests in securities backed by mortgage-backed housing agencies backed by single-family homes. This REIT has one of the highest dividend yields available at 14.5% and is one of the few REITs that pay monthly dividends.
Such high dividends come with some additional risk. The company manages to pay such a high rate because it has one of the highest leverage ratios in the industry, which stood at 9.1 at the end of the first quarter of 2021.
The company’s carrying value declined in the first quarter as a result of expected changes in interest rates, which should recover as the gap between short-term and long-term interest rates widens.
Ready capital (NYSE: RC)
Ready Capital focuses on small commercial debt balances on investments and owner-occupied commercial real estate. The company has also just increased its dividend, which currently yields 10.33%.
Ready Capital recently completed its merger with Anworth Mortgage Asset Corporation, a mortgage REIT primarily focused on RMBS. The merger has added some diversification to Ready Capital’s portfolio, but the company plans to reallocate a large portion of Anworth’s portfolio into more attractive investment opportunities.
The company’s shares are currently trading relatively close to their book value of $ 14.90 per share, but with new commercial loans being added to their portfolio, I expect their book value to rise over the next year. This should provide some upside potential for investors looking to add this profitable investment to their portfolio.
Cherry Hill Mortgage (NYSE: CHMI)
Cherry Hilly Mortgage is the smallest REIT on the list with a market cap of just $ 168.2 million. The company had to cut its dividends somewhat in 2020 due to the pandemic, but still offers a dividend of 10.51%.
The company invests in residential mortgages, but also earns a significant portion of its revenue from mortgage servicing. Mortgage rights income provides the company with some protection against short-term interest rate hikes, which should add some stability to dividend payments.
The stock is currently trading at a discount to the company’s book value of $ 11.08 per share, leaving some upside potential for investors.
Want to know more about investing in a REIT? See How to invest in a REIT
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