NEW YORK, NY -- (Marketwire) -- 11/13/12 -- Shares of high yielding REITs have been relatively flat this month. The Vanguard REIT ETF -- which tracks the performance of an index that measures the performance of publicly traded equity REITs -- has stalled after the Federal Reserve in September announced plans to purchase $40 billion in mortgage-backed securities a month. Five Star Equities examines the outlook for diversified REITs and provides equity research on American Capital Agency Corp. (NASDAQ: AGNC) and ARMOUR Residential REIT, Inc. (NYSE: ARR).
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Investors have long been attracted to the high yields of mortgage REITs, which currently averages around 13 percent, nearly 7 times the average dividend yield of the S&P 500. The Fed's announcement has caused drops in spreads, bond yields and homeowner's borrowing costs, and as a result company's earnings and dividends have been under pressure.
"Through the use of leverage, these REITs have yields in the midteens. At this time, mortgage REITs are benefiting from historically low short-term rates, but tightening spreads, or a sudden freeze in the credit markets, would have a significant negative impact on these firms," Morningstar analyst Patricia Oey wrote in a report.
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American Capital Agency Corporation pays an annual dividend of five dollars per share for a yield of around 16.2 percent. The company invests in residential mortgage pass-through securities and collateralized mortgage obligations for which the principal and interest payments are guaranteed by government-sponsored entities or by the United States government agency.
ARMOUR Residential REIT invests primarily in residential mortgage backed securities issued or guaranteed by a United States Government-chartered entity, such as the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, or guaranteed by the Government National Mortgage Administration, a United States Government corporation (Ginnie Mae). The company currently pays an annual dividend of $1.08 per share for a yield of around 15.5 percent.
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