Armour Residential Reit is one of the most widely traded stocks on the NYSE. Today at publication volume of shares traded has exceeded 65 million! This real estate company is so commonly traded because it is arguably a benchmark of the US housing market. When the American economy is excelling, ARR reaps the rewards. But when stagnation occurs ARR is left crippled.
Nevertheless an easing by the American government and a continued lowering of interest rates that will kill many money market accounts seeks to provide Armour with more leverage and an easier spread on their mREIT business. That means more money for shareholders in the form of dividends.
The sudden increase in trading volume has to do with the news of a change in the American mortgage market. The Consumer Financial Protection Bureau is working to decrease the number of foreclosures by implementing stronger guidelines initially with greater support and tougher requirements. While a stagnant housing market is bad for construction company’s and REIT’s that rent it benefits mortgage REIT’s otherwise known as mREIT’s who have lower interest rates to take advantage of.
Armour would stand to benefit because the largest portion of their business lies in buying mortgage backed securities. This is exactly as it seems; a high risk situation which if the US economy continues to falter will likely backfire on the company like it did for Freddie Mac and Fannie Mae just a few short years ago. This is also why investors are buying ARR. Although these are low yield because of their insurance against default, this would be a huge payoff if they are successful.
Besides that this REIT offers a high dividend payout (most REIT’s do by law) of $0.10 a month per share. It is yielding 17% in a market where most are happy to have 7-8% on their index fund. Armour Residential is performing at its best compared to competitors
Most investors are gleefully ignoring Armour and any other REIT that focuses on mortgage backed securities. They are either too complex to understand or seemingly too risky for investors to consider. This would explain why ARR is breaking beyond its 52 week high and growing. Interest has been slow but is quickly rising do to the high payoff potential of this housing play.
Annaly Capital (NLY) and Chimera (CIM) are the two most commonly traded residential housing plays besides Armour. Both sport juicy dividends that easily quench the thirst of a Graham or Buffet style value investor. Annaly’s 13% dividend has not been enough for analysts as of late as the stock continues to be downgraded over concern of the risk of these particular mortgage backed securities. Chimera is in a similar circumstance as the company has been pummeled lately due to irregularities and investigations in their financial bookkeeping. Without reliable fundamentals, investors are running for more promising mREIT’s, finding Armour to meet their demands.
Nevertheless both Annaly and Chimera have been in the business a long time. Annaly is a perennial favorite of mutual funds, individuals investors and indexes for strong management and headstrong decision making skills. Chimera actually holds one of the lowest percentages of mortgage backed securities at just over 4% of their holding. Less risk may actually benefit them long term as they improve their image right now.
Investors are continually questioning, “Should I be buying in the US housing market?” to either play a failing US economy or a rebounding US economy. Either method requires an immense amount of risk and should not comprise a majority of ones portfolio but a small minority.
Because investors have such a hard time understanding mREIT’s and mortgage investments and swaps it makes buying the stocks that more difficult because there are indeed so many different ways for you to lose money.
Instead investors should be focused on residential, commercial or office space REIT’s that are involved in property management and renting to tenants. The process is much more affordable and makes research on the given stock that much easier whether they are tied to a geographic market or a specific sector of real estate. I love BMR.
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