We're hitting the end of 2011 and it's a great time to look back on the performance of Armour Residential (NYS: ARR) , a smaller player in the market's hottest dividend sector.
A few Foolish facts about Armour Residential:
Year-to-Date Stock Return
Return on Equity
CAPS Rating (out of 5)
Sources: S&P Capital IQ and Motley Fool CAPS.
Armour is one of a number of mortgage REITs, including American Capital Agency (NAS: AGNC) and Invesco (NYS: IVR) , that have sprung up in the last few years to take advantage of very low interest rates. With the Fed promising to keep interest rates low through at least mid-2013 (and speculation rife that the policy could continue into 2014), Armour looks to have low funding costs for the next couple of years.
Still, the company has had some difficulty maintaining its earlier interest rate spreads. In its most recent quarter, Armour reported a rate spread of 2.18%, down from 2.88% year over year. It was also down sequentially, from the second-quarter's spread of 2.36%. That's not the right direction.
Like the rest of the mortgage REIT sector in 2011, Armour suffered through investor concern over potential regulatory reforms, and Operation Twist, the Fed's plan to reduce longer-term interest rates. A newly revised version of HARP -- the government's Home Affordable Refinance Program -- spooked investors a few months ago. The new rules allow qualifying homeowners to refinance regardless of equity, meaning that everyone from Armour to larger peers Annaly Capital (NYS: NLY) and Chimera (NYS: CIM) could face higher mortgage prepayments that could hurt their returns. But Armour said that less than 2% of its holdings are eligible for the revised program. And shares of Armour and others bounced back as investors shook off those worries.
While Armour climbed a dividend-adjusted 8% this year, investors own shares in such mortgage REITs for their huge yields, not the chance at capital appreciation. And right now Armour's yield looks pretty tasty, relative to its peers', as you can see in the table below.
American Capital Agency
CYS Investments (NYS: CYS)
Source: S&P Capital IQ.
But Armour also runs with the highest leverage of this group, making it more risky than others, all else equal. Still, with a lackluster economy, mortgage REITs including Armour should continue to do well in 2012. (You can see my favorite mortgage REIT stock here.)
But mortgage REITs won't always pay out these super-sweet dividends. When times get better and funding costs rise, watch out. You'll want to have plenty of all-weather dividend stocks in your portfolio.
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At the time thisarticle was published Jim Royal, Ph.D., owns shares of Annaly.The Motley Fool owns shares of Chimera and Annaly.Motley Fool newsletter serviceshave recommended buying shares of Annaly.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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