REIT Dividends in Danger as Interest Rate Spreads "Twist"
03 October 2011 - 11:16PM
Marketwired
High yielding REIT stocks have struggled immensely since the
Federal Reserve announced it will push long term interest rates
lower last month. Mortgage REITs typically borrow at low rates and
lend in the mortgage markets at higher rates, usually by buying
mortgage-backed securities. By purchasing bonds guaranteed by the
government, analysts argue these companies take on no risk of
default, with the principle concern being an interest rate risk.
The Paragon Report examines the outlook for diversified REITs and
provides equity research on American Capital Agency Corporation
(NASDAQ: AGNC) and CYS Investments, Inc. (NYSE: CYS). Access to the
full company reports can be found at:
www.paragonreport.com/AGNC
www.paragonreport.com/CYS
In its statement, the Fed noted that the economy is growing
slowly, unemployment is high and housing remains in a prolonged
slump. The central bank said in a statement that operation twist
was aimed at reducing the cost of borrowing for businesses and
consumers, including the cost of mortgage loans. It hopes that the
lower rates will encourage companies to build new factories and
hire more workers, and consumers to start spending again on homes
and cars and clothes and vacations.
REITs earn their money on the spread between low-interest
short-term borrowing and purchasing high-interest long-term
securities. To be classified as a REIT, a company must distribute
at least 90 percent of its taxable income to shareholders annually
in the form of dividends.
The Paragon Report provides investors with an excellent first
step in their due diligence by providing daily trading ideas, and
consolidating the public information available on them. For more
investment research on diversified REITs register with us free at
www.paragonreport.com and get exclusive access to our numerous
stock reports and industry newsletters.
Last month the Securities and Exchange Commission launched a
review that could subject REITs to tighter regulation. The SEC
announced that it will solicit public comment to determine if
mortgage real estate investment trusts should be regulated as
investment companies and therefore subject to the Investment Act of
1940. The SEC noted the Investment Act didn't foresee the explosive
growth of mortgage securities or the flood of other mortgage
investors that have entered the industry. According to The Wall
Street Journal a big concern for mortgage REITs is they will lose
their ability to employ high levels of leverage if they are subject
to the Investment Act. Mortgage REITs have high dividend yields
partly because the managers use high leverage, which can boost
returns.
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