Know The Best Income Investments are On Sale Now
Thu, Jan 17, 2013
Best Income Investments Today
The New Year has begun and as usual, the doomsayers have predicted this year to be the next big crash again. Of course, they also called that last year, the year before that, the year before that and on and on.
Still there has only been one major crash in the last 10 years. There’s only one major stock market crash about every seven years on average. So you can’t spend all of your time worrying. You’ve got to look at the opportunities presented to you.
Right now, one of the best investment opportunities for generating dividend income from stocks is also the cheapest it has been in five years.
Deep Value and Double Digit Yields All in One
One of the best income investments are a special type of Real Estate Investment Trust (REIT).
This special type of REIT also pays the highest dividends and, if bought when they’re this cheap, some of the safest investments available.
The REITs I’m talking about are Mortgage REITs.
These REITs essentially borrow money, take the borrowed money and buy mortgages, and then pay out at least 90% of the income collected from the mortgages to their shareholders.
Mortgage REITs can pay significantly higher dividends than many other REITs. In the past their dividend yields have reached well into the double digits. Some yields have reached as high as 18%.
Since these are really simple companies, it’s really easy to calculate their fundamental value. All you have to do is take the value of the assets (the mortgages they hold) and subtract their debt and you have their book value.
So valuing the shares is relatively easy and, as a result, determining when to buy them is just as easy. All you have to do is look at their book value per share, or what is a common investment valuation metric called the Price to Book Value (P/B) ratio.
When the P/B ratio is below one, they are selling for less than the value of their assets. When the P/B ratio is above one, they’re selling for more than their value. The time to buy is when the P/B ratio is below one. It’s just that simple.
Right now, the P/B ratios on these stocks has fallen to their lowest level in years. And as a result, mortgage REITs which are still paying double digit yields and are as cheap as they’ve been in years.
The Best Income Investments Are “On Sale” Now
Two of the largest and most widely held mortgage REITs are Annaly Capital Management (NYSE:NLY) and Hatteras Financial (NYSE:HTS).
According to their P/B values, they are the cheapest they’ve been in more than five years.
This chart from ycharts.com shows the historical P/B over the last five years of Annaly Capital Management:
The chart shows the P/B ratio has only dropped below one twice in the past five years. One of the times was when the market was bottoming out in March 2009. The other time is now.
This chart from ycharts.com shows the historical P/B over the last five years of Hatteras Financial is also hitting near record lows:
Hatteras is in the same valuation range as Annaly. They’re both selling at more than 10% discounts to their fundamental net value per share.
Both of these mortgage REITs are exceptionally cheap relative to their fundamental value.
For contrarian investors looking for the few opportunities presented in the current market, these mortgage REITs are out of favor, cheap, and offer the best capital appreciation potential with the lowest risk they’ve had in years.
On top of that Annaly’s dividend yield is 12.3% and Hatteras’ dividend yield is 10.6%.
Investors looking for great value or high yields can find both these leading mortgage REITs.
That rare combination of value and high yield will pay off well in the months and years ahead.
Executive Editor, Contrarian Insights
The Group of Big Investors in United States.
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