Not All of These 20% Yielders Are Safe

Nothing is more exciting, or more terrifying, than a dividend yield exceeding
10%. It's exciting because we all get visions of greenbacks filling our
brokerage accounts every quarter. It's terrifying because big dividends always
make me wonder if the payout is sustainable. I found three stocks yielding about
20% and wanted to see if they were safe dividends, and whether or not the stocks
were in danger of cratering and erasing any dividend gains. It turns theyre all
in the same sector mortgage REITs, or MREITs. This means they invest in
mortgage-backed securities. If youre already getting queasy, that's
understandable. These securities contributed mightily to the financial crisis
when they became toxic. But before you run for cover, understand that there are
many different MREITs, and investing in them can be quite lucrative. There are
agency MREITs, which hold mortgages issued or backed by the infamous Fannie Mae
and Freddie Mac. These quasi-government agencies are still in business and still
guarantee millions of home mortgages. That guarantee means default risk on this
type of mortgage is essentially nonexistent, and because of that lower risk, you
see lower yields. Non-agency MREITs are not agency backed or issued. There are
also hybrid MREITs, which have a combination of agency and non-agency mortgage
assets. Leverage is the key factor for MREITs. Agency MREITs can use more
leverage since their default risk is lower. MREITs make money on the spread the
difference between the short-term interest rates they pay to borrow money and
the long-term interest rates on the mortgages they hold in their portfolio. So,
these investments depend a lot on the interest rate environment. For now, the
Fed has indicated that interest rates aren't going anywhere. However, with all
the money the federal government has been printing, one wonders how much longer
that will remain the case. Invesco Mortgage Capital (NYSE: IVR ) pays a 21.6%
dividend, or $3.20 per year. This non-agency MREIT isnt doing very well. In this
environment, I would stay completely away from non-agency mortgages. Millions of
homeowners are underwater on their loan, and you don't want exposure to these
if they arent guaranteed. Maybe that's why the stock is trading at only 70% of
its book value. Investors arent placing much faith in the securities the company
holds or they'd bid the price up to closer to book value. The stock is down
30% year-to-date, which makes that dividend of small consolation. Stay away.
American Capital Agency (NASDAQ: AGNC ) is paying a hefty 20.1%. This is an
agency MREIT, so the mortgages are guaranteed. With a history of regular
dividends, and the fact that it went public right in the middle of the financial
crisis, I have a degree of confidence in this play.