April 27, 2020

Hello Richard Tucker

The Coronavirus has hurt most companies, including the smallest mom & pop shops to the largest public companies. There are a few companies that have benefited (Amazon, Microsoft, Google, Zoom, etc), but this article will focus on one industry that has been knocked down hard – Mortgage REITs.

For income investors, the question is, can these fallen warriors get back up to fight another day? If so, tremendous opportunities could be waiting for those with foresight and courage to invest while there is blood in the streets.

Lets take a look at the mortgage REIT companies that have issued preferred stocks & baby bonds. In general, baby bonds are safer than preferred stocks and preferred stocks are safer than the common stock of their parent. Therefore, baby bonds and preferred stocks could be the most conservative way to invest for both income and capital gains.


The table below lists all mortgage REITs that have issued baby bonds and preferred stocks. There are 17 companies, 45 preferred stocks and 3 baby bonds. Of these companies, several have reduced or suspended the Q1 common dividend, including AI, MFA, MITT and NYMT. Of these 4, 3 have also suspended their preferred stock dividends. These include MFA, MITT and NYMT


(Table 1)

Now that the companies in this industry have had time to react to stabilize the various liquidity crisis facing them, prices appear to have bottomed and are heading north. Believe it or not, prices have increased from 100% to 500% since they bottomed about a month ago. Clearly, investors are gaining confidence in the industry and the individual stocks.

Being an optimistic person, it is hard to believe that most or all of these companies will not be able to claw their way back to operate and provide the services they are mandated to do. In doing so, they will regain their financial well-being and ability to pay the preferred dividends and baby bond interest in the normal course of business. If all goes well, prices will continue to rise providing opportunities for both yield and capital gains for early investors.

All companies and industries have different ways of measuring safety and ability to meet their obligations. It is safe to say that debt and payout ratios are key financial metrics. High debt is always a problem in times of trouble so look for companies with low debt.

Besides debt ratios, payout ratios are also important and this table provides 2 key ratios. “Dividend payout” ratios compare the common stock dividend to the earnings that support the dividend; whereas the “preferred dividend payout” compares the preferred dividend to the earnings that support it. In both cases, the lower the ratio the better.

If you are interested in digging deeper, go to the I Prefer Income online “Preferred Stocks & ETD” program and check out these companies further. There are more than 35 fields of demographic and financial metrics covering all 650 preferred stocks and baby bonds in the database. And don’t forget to read available articles from analysts as well as to visit the company websites to read their latest earnings reports.


Rich Hill
I Prefer Income

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