The lower interest rates get, the trickier it becomes for mortgage real estate investment trusts (REITs) to turn a profit -- and today's interest rates are low and falling. As other mortgage REITs fruitlessly chase "safe" investments that return almost nothing, MFA Financial (NYSE: MFA) is shaking up its holdings instead, pursuing riskier investments with the promise of greater rewards. While that might seem like a dangerous play for a stock that appeals to safety-minded income investors, it could help the company sustain and increase its double-digit dividend yield in the long run.
Mortgage REITs invest in debt securities, earn interest income, and pass it on to investors via the dividend. They generally concentrate on residential mortgages (like the mortgage on your house) or commercial mortgages (the debt of office buildings and malls). MFA historically has concentrated on residential mortgage-backed securities (MBS) guaranteed by the U.S. government. These instruments carry no credit risk -- if the borrower doesn't pay, the government will.
MFA Financial recently reported fourth-quarter earnings of $0.21 per share, compared to $0.19 per share a year ago. The prior year's earnings were affected by special charges, so it doesn't represent necessarily represent organic growth. The EPS number came in above Wall Street expectations of $0.20 per share.