This Retirement Income Stream Pays 10.3% to 15.7%
January 30, 2020
This Real Estate Investment Pays Steady Retirement Income
From speaking with other investors, I know that virtually all of them want to earn more retirement income.
Interest rates have fallen to record lows. Now, not even a six-figure nest egg can throw off enough income to fund a comfortable retirement.
That has left savers in a tough spot. Do they cut back on expenses? Do they keep working for a few more years? Can they even retire at all?
One little-known type of investment could provide an answer. These safe, profitable businesses pay dividend yields between 10% and 17%. And thousands of investors already count on them for steady retirement income.
Let me explain.
The businesses I’m talking about are in a little-known niche called mortgage real estate investment trusts (mREITs). For dividend investors, these partnerships can be great sources of retirement income.
My colleague Jing Pan nicknamed these firms “alternative banks” because they operate in much the same manner as traditional financial institutions. mREITs borrow money from lenders at low interest rates. They then invest that money into mortgage loans that pay higher yields.
Their profit, called the spread, comes from the difference that mREITs receive in interest on loans and what they pay to lenders. But unlike traditional banks, mREITs have no branches, no tellers, and no ATMs.
This business model has a number of advantages for investors.
These investments generate steady profits, first off. The mortgage tends to be the last bill people skip during a financial downturn. That means a steady supply of payments that roll in like clockwork month after month.
Moreover, most mREITs invest in a specific type of mortgage loan called “agency debt.” This means the U.S. government will repay investors if the homeowner falls behind on their bills. In other words, taxpayers, not investors, take most of the risk.
Finally, mREITs have far less in the way of overhead. Most of them consist of a single office and only a handful of employees. As a result, almost every dollar of operating profit flows to the bottom line.
This has resulted in outstanding profits for unitholders. Since 2011, the MVIS US Mortgage REITs Index, a good barometer of the whole industry, has posted a compounded annual return of 10.1% per year. Even during the last financial crisis, mREITs sailed through without so much as a hiccup in distribution payments.
More importantly, the industry pays out some of the highest yields around. It’s not uncommon to see mREITs pay distribution yields as high as 12%, 15%, or 17%. That makes them some of the best sources of retirement income around.
| Company Name & Stock Ticker | Market Cap | Yield |
| Arlington Asset Investment Corp (NYSE:AI) | $211.5 Million | 15.7% |
| New York Mortgage, Trust Inc. (NASDAQ:NYMT) | $2.1 Billion | 12.6% |
| New Residential Investment Corp (NYSE:NRZ) | $7.0 Billion | 12.0% |
| Western Asset Mortgage Capital Corp (NYSE:WMC) | $570.0 Million | 11.6% |
| Two Harbors Investment Corp (NYSE:TWO) | $4.2 Billion | 10.5% |
| Annaly Capital Management (NYSE:NLY) | $14.0 Billion | 10.3% |
(Source: Google Finance, last accessed January 29, 2020.)
I expect these payouts to balloon in the next few years.
Over the past few months, the Federal Reserve has slashed interest rates in a bid to jump-start the economy. That won’t affect how much mREITs receive in interest on their loans for quite some time. It will, however, drastically reduce how much they pay lenders.
Wall Street has taken notice. Capital has poured into the industry over the past few months, bidding up share prices. If the Fed continues to cut interest rates, this could be just the beginning.
Income hunters should give this investment niche a look.
