Tuesday, November 16, 2010

A REIT With A Double Digit Yield

REIT’s are a favorite investment class of income seeking investors. They typically pay very high yields since they are required to pay out 90% of earnings to shareholders. Dividend investors can get a double digit yield by investing in one REIT in particular. Let’s take a look at a stock that you have probably never heard of, Hatteras Financial (HTS).

Hatteras is a relatively new REIT having only been around since 2007. Hatteras Financial is a real estate investment trust (REIT) that invests in mortgage backed securities that are guaranteed by the US government or a governmental agency. The company invests in many residential mortgages that are backed by Fannie Mae and Freddie Mac.

Hatteras has found a sweet spot in the mortgage market as the company has been able to take advantage of a low interest rate environment. Hatteras has been able to borrow money at low rates and invest in securities paying out a higher rate. The risks of in investing in Hatteras are that a rising interest rate environment will cut into the company’s profitability and that the US government defaults on its obligations.

The stock currently trades at just slightly over its book value of $26 per share. The company has a huge debt burden of $6.8 billion dollars which is normal since most real estate investment trusts use leverage position to generate returns. Hatteras’ operating margins and profit margins are higher than competitors. The firm’s revenue dipped -4% last month which is substantially higher than the -90% decline that competitors experienced.

The stock is currently trading at almost $30 a share and the company has a great dividend yield. Hatteras Financial is yielding 14.6% and has no plan to cut the dividend anytime soon. The company is currently paying out 100% of earnings via dividends. The company should be able to increase earnings over the next few years so that the payout rate will drop to just 90% of earnings.

The dividend alone makes Hatteras an attractive stock for income investors. The stock’s dividend should be trusted for at least the next year.

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