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Beat Inflation with This 19% Dividend-Payer

|November 7, 2022

Inflation is still at elevated levels, and the Federal Reserve is signaling no near-term end to its quantitative tightening policies.

Investors looking to generate higher levels of income from their investment portfolios should consider Real Estate Investment Trusts, or REITs.

In case you’re not familiar with them, REITs are companies that own real estate properties and lease them to tenants, or they invest in real estate backed loans. Both things generate a steady stream of income.

What’s great about REITs is that they are required to distribute 90% of their taxable income to shareholders annually, in the form of dividends. In return, REITs typically do not pay corporate taxes.

That’s where I want to focus our attention today, and my favorite pick could potentially generate a massive 19% dividend.

Incorporated in 2009 and headquartered in Minnetonka, Minnesota, Two Harbors Investment Corp. (TWO) operates as a REIT. It focuses on residential mortgage-backed securities (RMBS), residential mortgage loans, mortgage servicing rights, and commercial real estate in the United States.

The trust derives nearly all its revenue in the form of interest through available-for-sale securities.

At the beginning of this year, with mortgage spreads standing near record-tight levels, the company added significantly to its mortgage servicing rights (MSR) portfolio. It also reduced residential mortgage-backed security (RMBS) balances and overall leverage to help protect against spread widening.

Those actions successfully reduced losses during the last two quarters. Now, with mortgages currently standing at historically wide levels, the company has repositioned its portfolio again to take advantage of the market environment by increasing its RMBS exposure and leverage.

In plain English, a wider spread between what it costs for TWO to borrow money versus what it can generate in yields to borrowers means the company can generate higher profits. It can then pass those gains along to shareholders.

And because the company qualifies as a REIT for federal income tax purposes, it must distribute at least 90% of annual taxable income to its stockholders.

The company is expected to pay an annual distribution of $2.72 per share which translates into a massive 19.06% yield.

TWO is scheduled to release Q3/2022 results tomorrow, November 8, 2022 (with a conference call on November 9, 2022, at 9:00 a.m. ET), so some of the distribution numbers could change.

Assuming the numbers don’t change too much, TWO’s massive payout is worth considering as an inflation-beating opportunity.

I’ll have another inflation-beating investment idea next Monday. Keep an eye on your inbox.

Until then, have a great week.

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The secret momentum driver elevating market indexes to all-time highs, again and again, is none-other than the “passive investing” trend. It’s going on unbeknownst to even the drivers of this momentum bus.

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Here are the pitfalls of passive investing and how bad the fallout could be if passive investors discover the trap they’ve entered, turn active, and sell.

The almost self-perpetuating cycle of rising markets attracting passive investment capital into index products, which boosts the value of indexes as money flows into them, which attracts more sidelined money and compels investors to sell actively managed funds and buy passive index-following funds, which have been lowering their management fees since they aren’t actively managed, which attracts more investor capital into the growing universe of index funds, which keep increasing in value as sponsors and their authorized participants buy all the underlying stocks in the indexes they track when investors buy those packaged products in the open market, is, almost self-perpetuating.

But you know the saying, almost only counts in horseshoes and hand grenades.

The truth is passive investing’s virtuous positive momentum manufacturing feedback loop isn’t a guarantee.

What passive investors aren’t seeing, because they aren’t looking through or behind the mad rush into what looks like a better mouse trap, is that more money flowing into index funds increases systemic risks inherent in the investment.

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