Dividend Edition: Three Mortgage-Related Investments

In today’s Dividend Edition, I have three investment ideas that will hold particular appeal for anyone who’s ever had to make mortgage payments. That’s because these ideas are all ways for you to make money off others’ mortgages! We’ll start with the lowest-risk, lowest-yielding idea and work our way up.

My first idea is a mutual fund that is available at a big discount right now, giving it a yield of about 2.6%. Here’s the recommendation, from The Kelly Letter Editor Jason Kelly, via the Dividend Digest:

“A good alternative to cash is a safe bond or bond-like fund. These don’t make much, but they don’t lose much—if any—when the market dips. That’s the goal, right? The safe part of a portfolio should not go down in bad markets, but should make a little more than a bank account. One of my favorites is Vanguard GNMA Fund (VFIIX). As its name implies, it focuses on Ginnie Mae mortgage securities, which are backed by the U.S. government and are, therefore, as safe as Treasuries. VFIIX hasn’t lost money in a calendar year since 1994, navigating even the meltdown of 2008 in style. It doesn’t gain much (only 2.4% last year), but any gain is better than a bank account or money market fund, and it yields more than 2%. Its official SEC yield is 2%, but its market yield has topped 2.5% recently.” – Jason Kelly, The Kelly Letter, 4/14/13

Our medium-risk, medium yield idea comes from the Investment Digest. Stocks related to the improving housing and mortgage market—including a specialty mortgage servicer and a realtor franchise—made a very strong showing in the latest Investment Digest. This stock, the nation’s largest mortgage lender, was recommended by two of our contributors, Personal Finance and Baxter Investment. Here’s part of the Baxter recommendation:

Wells Fargo’s (WFC) first quarter results showed strong improvement year over year, but highlighted a lack of momentum compared with the last quarter of 2012. The company managed to report record earnings for the quarter, aided by fierce expense control. Credit quality continued to improve, and the bank increased both deposits and loans. We think the shares offer value at current levels. … In the first quarter, Wells Fargo’s return on assets was 1.49% and its return on equity was 13.59%. The company grew its deposit and loan base, and increased its capital levels. The company has increased its dividend twice in 2013, and is committed to repurchasing more shares than last year. Although we expect mortgage refinancings to slow down, we think the bank is performing very well. We like the shares.”

William Baxter, III, Baxter Investment, May 2013

In addition to their growth potential, WFC shares currently yield 3%.

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Finally, our higher-risk, high-yield idea comes from the latest Dividend Digest, and was recommended by Leeb’s Income Performance Letter Editor Stephen Leeb. Here’s part of his recommendation:

“[Mortgage REIT] Starwood Property Trust, Inc. (STWD 27.28 NYSE – yield 6.70%) [is] the country’s largest commercial REIT, and its scale (managing assets that exceed $15 billion) gives it a meaningful competitive edge. … The commercial real estate market, where Starwood originates most of its loans, enjoys strong supply and demand fundamentals, significant barriers to entry, and many as yet undeveloped opportunities (its current deal pipeline is $650 million); its recent pact with LNR Property further improves Starwood’s position. Of course, competition is rising even in the commercial loan market, which will pressure the profitability somewhat going forward. There are risks, of course—high dividends like those paid out by mortgage REITs cannot be risk-free. Starwood’s operating results depend largely on differences between income earned on its investments and its borrowing and hedging costs. The borrowing cost generally rests on prevailing market interest rates and is negatively leveraged to rising rates: During such a period, borrowing costs typically rise faster than the yields earned on the leveraged floating rate mortgage assets, while yields earned on leveraged fixed-rate mortgage assets remain static. This could reduce the company’s net interest margin. … We think the risks are well justified by the REIT’s market position, growth prospects and its current dividend of 6.4%. Buy at current levels [for] income and exposure to recovering commercial property markets.” – Stephen Leeb, PhD., Leeb’s Income Performance Letter, May 2013

I hope these ideas inspire you to make some money from mortgages, instead of spending money on them! And of course, we have lots more ideas just like this in every issue of the Dick Davis Dividend Digest.

Click here to learn more about this month’s recommendations.

Wishing you success in your investing and beyond,

Chloe Lutts Jensen

Editor of Investment of the Week


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