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For investors looking for income, Real Estate Investment Trusts are often an excellent source of potential investments. Mortgage REITs are a unique segment among the REIT universe, and many have extremely high yields.

Mortgage REITs are not without risk. These companies purchase mortgages and generate income from the monthly mortgage payments. Mortgage REITs borrow money and then acquire mortgages and make a profit off the difference in the rate.

As long as the borrowing of capital is done at low interest rates to purchase mortgages with higher interest rates then the REIT should perform well. Due to the higher risk of investing in mortgage REITs, investors should aim for quality when it comes to mortgage REITs.

This article will discuss 3 top mortgage REITs for income investors.

High Yield Mortgage REIT: AGNC Investment Corp. (AGNC)

Founded in 2008, AGNC maintains a portfolio of residential mortgage pass-through securities, collateralized mortgage obligations (or CMO) and non-agency mortgage-backed securities (or MBS). The trust earns nearly all of its income from the interest on mortgages.

The bulk of the trust’s investments are fixed-rate agency MBS, with the majority of these having a 30-year maturity. This gives AGNC a long timeline to collect income from its assets. A large portion of AGNC’s portfolio is guaranteed by government-sponsored enterprises. Additionally, AGNC does offer some geographical diversification as a significant portion of counterparties to asset are located in Europe.

AGNC reported its Q1 2023 results on April 24th, 2023, reporting a comprehensive loss of $(0.07) per common share, including a net loss of $(0.31) per common share and $0.70 net spread and dollar roll income per common share. The company also declared $0.36 dividends per common share for the quarter. The investment portfolio as of March 31, 2023, was $56.8 billion, and the tangible net book value per common share was $9.41.

AGNC has a high dividend yield of 14%. The company also pays a monthly dividend, which allows investors regular cash flows compared to most other securities, which usually pay dividends on a quarterly basis.

Even with the uncertainty surrounding the industry and the trust’s history of dividend cuts, AGNC’s current dividend appears to be safe for the time being.

High Yield Mortgage REIT: Annaly Capital Management (NLY)

Annaly primarily also invests in mortgage-backed securities and non-agency residential mortgages assets. In addition, the trust originates and invests in various other types of loans. The trust has an investment portfolio of more than $100 billion.

Annaly separates itself from the traditional mortgage REITs in that it has a wider variety of income streams. The trust does receive income from its MBS and CMO assets, but has presence in other areas as well, such as loan origination, securities and commercial real estate investments. This allows the trust to focus on its better-performing businesses when one encounters headwinds. The trust also is one of the larger mortgage REITs, giving it scale that few others enjoy.

On April 26th, 2023, NLY announced its financial results for the first quarter. Annaly Capital Management reported a GAAP net loss of $1.79 per average common share in Q1 2023. The company generated earnings available for distribution of $0.81 per average common share. Annaly had an economic return of 3.0% for the quarter and book value per common share of $20.77. The company declared a quarterly common stock cash dividend of $0.65 per share. Its total assets were $85.5 billion, including $77.6 billion in highly liquid Agency portfolio. Annaly's GAAP leverage was 5.9x and economic leverage was 6.4x.

NLY stock yields 12.4%.

High Yield Mortgage REIT: ARMOUR Residential REIT (ARR)

ARMOUR focuses almost exclusively on residential mortgage-backed securities. ARMOUR has an investment portfolio of less than $8 billion, making it considerably smaller than many of its peers as its investment portfolio.

While ARMOUR is also considerably less diversified than the other names discussed here, the assets the trust invest in are almost all guaranteed or issued by a government entity. This provides some more assurance that the mortgages can be repaid. Typically, these loans are backed by Fannie Mae, Freddie Mac or Ginnie Mae.

ARMOUR reported Q1 results on April 26th, 2023. The Book Value per Common Share was $5.44 and the liquidity as of March 31, 2023, was approximately $550 million, which comprised $135 million in cash and $415 million of unlevered Agency and US Treasury securities. ARMOUR pays dividends on a monthly basis and has previously announced a May common stock dividend of $0.08 per share, payable on May 30, 2023, to holders of record on May 15, 2023.

ARMOUR is another trust that pays a monthly dividend. Shares yield 18.4% and the annualized dividend of $0.96 is expected to consume nearly all of the company’s funds-from-operation this year.

The payout ratio and continued struggles of the business make ARMOUR’s dividend the least safe of the names discussed here, though we do believe it is a positive that the dividend has remained steady for more than a year.

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