For months, I’ve argued that REIT yields are high due to investor fear of stocks that mentions words like “adjustable-rate,” “mortgage-backed” or “pass-through securities.” I just stumbled across an interesting article at Fool.com that argues there more be less apparent reasons for the high-yields on REITs like American Capital Agency Corp. (NASDAQ:AGNC), which is yielding 19+ percent, Chimera Investment Corporation (NYSE:CIM), which is yielding 17+ percent and Resource Capital Corp. (NYSE:RSO), which is yielding 14+ percent.
The REIT play is only good so long as the Fed keeps lending rates down Fool.com argues. Once the spreads on interest rates go down, so will the profits at AGNC, CIM and RSO. Since, the REITs are required to pay out 90 percent of their income to shareholders, the only way for them to maintain their growth will be through dilutive share offerings, which will drive down the yields.
Currently, Fool.com argues, REITs are paying out a lot because they’re getting subsidized by the government. While that argument may hold water two years from now, I don’t see the logic in selling off the stocks in favor of lower-yielding dividend plays right now. Why not wait until the Fed’s rate increases look imminent before jumping ship on 19+ percent returns? That’s the question the article fails to address, and it’s the reason I’m still bullish on REITs.
Related
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- Options pointing to a buy for American Capital Agency Corp. (NASDAQ:AGNC)?
- Price target on Chimera Investment Corporation (NYSE:CIM)? How about $4.25
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