Are These Mortgage REITs Too Risky Right Now?

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A long-standing tenet of investing holds that the greater the risk, the greater the reward. But every investor has a different tolerance for accepting risk. One measure of a stock’s risk is its beta, or how it compares with the entire stock market. A beta of 1.0 is said to be on par with the general market. A beta above 1.0 carries a higher risk, while anything below 1.0 is a lower risk.

Mortgage REITs, also known as mREITs, are among the highest-yielding dividend stocks on Wall Street but often have high beta levels. Even the more well-known mREITs, such as Annaly Capital Management Inc. NLY, has a beta of 1.21, meaning its risk level is significantly higher than the general market.

Other mREITs such as Orchid Island Capital Inc. ORC, hold a substantial risk-reward level to the investor. Orchid’s beta is 1.31 but its five-year dividend yield is over 18%.

MFA Financial Inc. MFA is an mREIT currently priced at $10.64 that offers a 15.7% dividend yield. Many investors with limited capital may be inclined to buy a low-priced stock like MFA with the hope of growing their wealth through a strong dividend. But along with the dividend comes a 1.69 beta. A strong market correction can wallop a high-beta stock and, as proof, MFA has dropped almost 20% over the last month. An investor would need five or six quarterly dividend payments just to break even.

On the other hand, some mREITs are equal to or less risky than the overall stock market. AGNC Investment Corp. AGNC with its 12% dividend yield only sports a beta of 1.07, while ARMOUR Residential REIT Inc. ARR with a 17% dividend yield has a beta of only 0.99. But that hasn’t prevented ARR from falling 12% since Aug. 1.

Uncertain economic conditions can also increase the risks of mREITs. Rising interest rates make borrowing costs much more expensive and deplete the prices of an mREIT’s bond assets.

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So to answer the question, “Are mortgage REITs too risky?”, it would seem that some, but not all, of them carry more risk than the general market. Therefore, investors need to assess the beta of the REIT, the current economic conditions and also to review the REIT’s history for price movement and dividends paid over a five-year minimum.

Unfortunately, within the last two years the charts of too many mREITs look like a Coney Island roller coaster. For example, Annaly Capital began September 2020 at $5.85, rose to $8.14 by June 2021, then sold off again to $5.51 by June 2022. Since June it’s touched $6.99 and is now back to $6.36.

Investors should also consider how adventurous or risk-averse they are before buying mREITs. Here are three situations when it may actually be advantageous to buy them:

1) Younger investors with a long investing time horizon may not care about price fluctuations as long as the strong dividend payments continue. With a high-risk mREIT it probably pays to take the cash rather than using a dividend reinvestment plan (DRIP). 


2) Senior citizens who never plan to sell a dividend stock as long as it provides ample income to cover recurring bills. Eventually they will leave the portfolio to their heirs. The large dividend payments can even go toward their required minimum distribution (RMD).

3) The entire mREIT sector is so badly beaten down that the price and dividend yield make mREITs a screaming bargain.

However, if you are a risk-averse investor, investing in mREITs may not be for you. Additionally, one should avoid mREITs after they have run up 25% or more. In such cases the dividend yield will decline as the price moves higher, and the risk of a strong pullback increases. The worst mistake is to chase runaway prices, only to lose 20% and ultimately panic sell just as a stock nears a bottom.

Finally, investors should assess the strength or weakness of the current dividend yield. Is it sustainable? Is there a history of discontinued or reduced dividends? Stocks with unstable dividends are poor performers in the long run, so investors should always choose mREITs with the best dividend histories.

Today’s Private Markets News Highlights

  • The private debt investment platform Percent is launching a new corporate debt offering for Taiger, an international, VC-backed software company, with a 15-17% APY. The platform’s recent H1 update shows an average historical yield of 12.38%.
  • The CalTier Multi-Family Portfolio Fund recently completed a new investment in a portfolio of four multi-family properties consisting of 185 units. The CalTier Multi-Family Portfolio Fund is one of the few non-traded real estate funds available to non-accredited investors and has a minimum investment of $500. Year to date, the fund has produced an annualized cash-on-cash return of 7.02%.

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