Mortgage REITs operate quite differently than the equity REITs most people are familiar with. Instead of investing in income-producing properties, mortgage REITs invest in loans secured by real estate. Most mortgage REITs do this by using short-term debt with low-interest rates to invest in long-term mortgages that pay a higher rate and earn a profit from the yield spread.

The risks associated with the mortgage REIT business model became apparent last year when several of them received margin calls on their short-term debt that they struggled to pay. 

Yet the risk often comes with high rewards since mortgage REITs typically pay some of the highest dividend yields available. These three mortgage REITs have recovered well over the past year and offer dividends above 10%. 

Orchid Island Capital ORC

Orchid Island Capital primarily invests in agency residential mortgage-backed securities secured by single-family homes. This REIT has one of the highest dividend yields available at 14.5% and is one of only a handful of REITs that pay dividends monthly.

That high dividend does come with some added risk. The company manages to pay such a high rate because it has one of the highest leverage ratios in the industry, which was 9.1 at the end of the first quarter for 2021. 

The company’s book value took a hit during the first quarter as a result of anticipated rate changes, which should recover as the spread between short-term and long-term interest rates widens.

Ready Capital RC

Ready Capital focuses on small-balance commercial debt made on investment and owner-occupied commercial properties. The company also just increased its dividend, which currently has a yield of 10.33%

Ready Capital recently completed a merger with Anworth Mortgage Asset Corporation, a mortgage REIT primarily focused on RMBS. This merger added some diversification to Ready Capital’s portfolio, but the company’s plan is to redeploy the majority of Anworth's portfolio into more attractive investment opportunities. 

The company’s stock is currently trading relatively close to its book value of $14.90 per share, but with new commercial loans being added to their portfolio I expect their book value to increase over the next year. This should provide some upside for investors that want to add this income investment to their portfolio. 

Cherry Hill Mortgage CHMI

Cherry Hilly Mortgage is the smallest REIT on the list, with a market cap of only $168.2 million. The company had to make some dividend cuts in 2020 as a result of the pandemic, but still offers a dividend of $10.51%.

The company invests in residential mortgages, but also receives a large percentage of its revenue through mortgage servicing. The income from its mortgage servicing rights provides the company with some protection against a rise in short-term interest rates, which should add some stability to the dividend payments. 

The stock is currently trading at a discount to the company’s book value of $11.08 per share, leaving some upside potential for investors.