Two Harbors' Dividend X-ray

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Not all dividends are created equal. Here, we'll do a top-to-bottom analysis of a given company to understand the quality of its dividend and how that's changed over the past five years.

The company we're looking at today is Two Harbors (NYS: TWO) , which yields 16.6%.

Industry
Two Harbors, along with competitors Chimera Investment (NYS: CIM) and Armour Residential (NYS: ARR) , are mortgage REITs that take on short-term debt to fund large holdings of mortgage-backed securities. The financial crisis of 2009 was actually good for the industry in that a lot of money left the sector, providing opportunities for the strongest players to continue to operate. As such, in the past few years the industry has been reaping money as short-term rates are very low and long-term rates have been high. Recently, however, shares have taken a hit as the Federal Reserve has begun taking steps to reduce long-term interest rates.

Dividend
To evaluate the quality of a dividend, the first thing to consider is whether the company has paid a dividend consistently over the past five years, and if so, how much it has grown.

Two Harbors' dividend has slowly risen since its IPO at the end of 2009.

Sustainability

For a mortgage REIT, the most important measure to follow is a company's interest rate spread. This is the difference between the rate at which the company borrows money and the rate at which it lends out money.

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Source: S&P Capital IQ.

Two Harbors' interest rate spread, while having declined from its peak levels, is still very high and will likely remain so until interest rates begin rising again. As the Federal Reserve has stated it won't raise rates until 2013 at the earliest, you have some time before this will happen.

Alternatives

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Source: S&P Capital IQ.

There are some alternatives out there in the industry. Annaly Capital (NYS: NLY) has the lowest trailing yield of its peer group at 14.4% as well as the lowest interest rate spread. Invesco Mortgage Capital's (NYS: IVR) trailing yield of 18.2% is higher than Two Harbors', but its interest rate spread has been dropping steadily. Last quarter it was 2.75% and a year ago it was 4.11%. American Capital Agency (NAS: AGNC) rounds out the group with a trailing yield of 20% and a low interest rate spread. The company has consistently paid a $1.40 annual dividend, though at some point that may go down with interest spreads falling.

Another tool for better investing
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At the time this article was published FollowDan Dzombakon Twitter at@DanDzombakto check out his musings and see what articles he finds interesting.The Motley Fool owns shares of Chimera Investment and Annaly Capital Management.Motley Fool newsletter serviceshave recommended buying shares of Annaly Capital Management. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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