Market Vectors Mortgage REIT Income ETF, a rules-based index intended to track the overall performance of publicly traded mortgage REITs, has risen by more than 10% year-to-date, according to a report published by Five Star Equities.
Five Star Equities' latest report outlines the company's outlook for diversified REITs and specifc investment research on two mortgage REITs called American Capital Agency Corp. and Chimera Investment Corp.
In the current market environment, REITs are more attractive than the fixed-income markets because of their above-average dividend growth outlook.
The report cited figures from Keefe, Bruyette & Woods (KBW) that show an expectation of a 10% annual dividend growth per year for the next few years.
American Capital invests in RMBS and CMOs for which the principal and interest payments are guaranteed by the GSEs or by the Federal Housing Administration. The company presently pays an annual dividend of $5 per share for a large yield of more than 17%.
Through its subsidiaries, Chimera Investment invests in RMBS, residential mortgage loans, commercial mortgage loans, real estate-related securities, and other asset classes. The company currently pays an annual dividend of 44 cents a share for a yield of roughly 14.9 percent.
According to Nomura Securities analyst Bill Carcache, effective prepayment risk management helps agency mortgage REITs generate higher returns "by being able to run at higher leverage without compromising their equity cushion and minimize spread compression."