mREITs are a special type of REIT which invests in mortgage back securities (MBS). You should read our article on What are mREITs first if you are unsure of how mREITs work.
Now, some investors might hear the word mortgage back securities and immediately think of that’s what caused the Financial Crisis on Wall Street and the recession. However the MBS which helped caused the financial crisis were backed by very low quality sub-prime mortgages and were wrongly rated a high grade by credit agencies. Those MBS combined with all the credit default swaps and derivatives written on them did help cause the Financial Crisis.
But the MBS Armour invests in are high quality mortgages which are issued or guaranteed by government sponsored enterprises such as Fannie Mae, Freddie Mac, and Ginnie Mae. Therefore the risk of default is almost negligible.
That’s not to say ARR does not have any risk as an investment. First of all like other mREITs, ARR is highly leveraged. The company’s leverage ratio is generally six to ten times. This means they borrow between $6 to $10 for every $1 of asset they own. This is why the company can pay out a dividend yield of above 17% currently.
The one main risk with all mREITS is interest rate risk. An increase in interest rates can result in a significant decrease in the amount ARR can pay out as dividends. It can also lower the value of the MBS the company owns. You should read the FAQ on Armour’s website for the additional risks involving the company and their investment strategy.
That being said as long the Federal Reserve doesn’t raise interest rates, ARR should be able to pay dividend yields above 10%. Fed Chairman Ben Bernanke has said they will keep interest rates at the current levels until at least late 2014.
So until late 2014 or until there are signals interest rates will rise, mREITs in general are a good investment for those looking for some very high yields. However we recommend investors only place a portion of their portfolio into mREITs. Our rule is never invest more than 15-20% of our portfolio into any given sector.
Estimated Annual Dividend Per Share: $1.20
Current Yield as of 5/25/2012: 17.2%
Dividend Payout Frequency: Monthly
Ex-Dividend Dates: Between the 11th and 13th of every month
Payment Dates: 1 day before the last business day of every month
Disclosure: We are currently long Armour Residential REIT (ARR)