Get Paid Double-Digit Yields to Trade these Stocks
Interest rates will stay low for at least the next three years if the Federal Reserve gets its way, and they usually do when it comes to interest rates. This policy will hurt savers but could generate big profits for companies that can borrow cheaply and lend the money out at high rates, profiting from the difference between the yields. Investors can share in those profits with two stocks that offer yields of about 14%.
Normally, I look at ETFs but when looking for income, individual stocks can be the best options. Right now, mortgage REITs look especially strong. A REIT is a real estate investment trust, a special investment structure that requires the company to pay out at least 90% of its income to share holders. Mortgage REITs invest in mortgage-backed securities (MBS), those toxic pieces of paper that were blamed for causing the financial crisis in 2008.
While some MBS are toxic, other are safe and I found two companies that have a track record of finding the good ones. They borrow money at low rates, under 2%, and use leverage to buy MBS that can pay 7% or more. The REITs can make returns of 15% on their investment and are required by law to distribute that income to their investors.
These stocks could even see extra upside if the Fed decides that another round of quantitative easing is required. Some analysts think the Fed could buy up to $1 trillion worth of MBS if that happens. All that buying would increase the prices of MBS and could lead to capital gains in these stocks.
My 26-week ROC strategy is saying mortgage REITs are a buy. Annaly Capital Management (NLY) just gave a buy signal in the past week when the ROC indicator turned positive. The stock has a yield of more than 14% and is a favorite of fixed income market experts like Jim Grant and Bill Gross. This stock could gain about 11% before hitting resistance near $18.75, offering a total return of about 25%. A weekly close below $16.00 could be a signal that the stock is headed lower. NLY has held above this level for almost all of the last three years and has delivered a total return of 73% to investors over that time.
CYS Investments (CYS) has delivered a similar gain over the past three years and is among the best performers over the past six months. Just like NLY, this stock has a dividend yield of about 14% and is trading near its book value. This stock has strong support at $12.00 and that is a good stop level to use for this trade. If the Fed becomes a big buyer in the MBS market, this stock could also see double digit gains and a total return of 25% is very possible for share holders.
Income stocks usually offer limited upside. Potential returns of 25% a year are rare for conservative investors and those possible gains make these two stocks a good buy for investors tired of the 2% yields that Treasuries offer.