But if I knew how to manage my portfolio safer and smarter than most hedge fund managers, I could realistically grow my wealth.
The Fed decided to stand pat
The Fed decided to maintain its current pace of asset purchases at the FOMC meeting last week. The Fed was surprised at the market’s reaction, but it shouldn’t have been. At the last Fed meeting, Bernanke said that the Fed expects unemployment to continue to fall (check), and if unemployment behaves as the Fed expects, then it will start reducing asset purchases. Well, unemployment has been falling (though for the wrong reasons) and the Fed decided not to act. It was a surprising move, and it lends support to the argument that the Fed was targeting something else (leverage in the system) and not necessarily inflation.
Regardless of what the Fed plans to do, it’s in a bind with mortgages. As the REITs lower their leverage and foreign governments sell US fixed income assets, the Fed is more or less the only natural buyer. If the Fed decides to taper purchases of MBS (mortgage-backed securities), we could see some turbulence in prices as the market looks for the marginal buyer. This would undoubtedly affect the big agency names like Annaly (NLY), MFA Financial (MFA), and American Capital Agency (AGNC).
The market gave REIT investors a gift, although it may be short-lived
The QE reprieve was enough to get the REITs going as the mortgage REIT ETF (MORT) took off on the news. Most of the REIT sector was up—although to be fair, the entire market was up a lot. Does this move by the Fed change the secular (long-term) story for the REITs? Absolutely not. Rates are still going up, and we’re starting to see the REITs cut their dividend. Last week, Hatteras (HTS) declared a quarterly dividend of 55 cents a share after paying 70 cents the quarter before. This demonstrates the folly of projecting dividend yields for REITs. If you were looking at Hatteras’ 70 cent dividend and annualizing it out, you would be looking at a 14.5% dividend yield. However, if you annualize the 55 cent dividend, you’re looking closer to 11.3%. And that assumes it doesn’t cut the dividend more. Remember this for mortgage REITs: unlike typical stocks, which try to maintain a predictable dividend yield, REITs can’t maintain a predictable dividend yield. To maintain REIT status, they must pay out 90% of their income as dividends. As income fluctuates, so does the dividend. Most other stocks are absolutely loath to cut their dividend, but it’s folly to assume that reluctance applies to REITs.
Don’t forget the bond market is no longer on your side. The above chart shows how long interest rate cycles can be. Yes, REITs can be a great way to get yield and can be superb investments. But the ground has shifted. They will no longer be an easy way to collect ever-increasing dividends.
© 2013 Market Realist, Inc.