I am holding significant positions in two REITs with huge dividends; Annaly (NLY) and American Capital Agency (AGNC). These are agency REITs, they invest in mortgage obligations guaranteed by government agencies. So far I made a lot of money by holding them. But all good times come to end.
First, my initial idea. These two companies use a lot of leverage, buy government backed mortgages and pay huge dividends. There is little or no risk to principal, the only significant risk is increase of borrowing costs, which depend on Fed rate. I estimated (correctly) that Fed is in no hurry to raise rates.
But bad things started happening. First, Annaly, then American Capital Agency reduced dividends. It was unexpected. OK, Annaly made a serious mistake. They decided to deleverage in time of low rates. And I am waiting for a good price to close that position. But there is another problem for both companies: Obama's mortgage refinancing plan. Currently, many homeowners have trouble refinancing their mortgages, even if they pay in time. There are several reasons, but main reason was outlined by Felix Salmon here. In short, homeowners were forced to pay big rates. Bad for them, good for Annaly and AGNC. Now, Obama's plan gives homeowners possibility to refinance. Good for homeowners, good for economy, bad for REITs.
Today reaction to AGNC dividend reduction was interesting. Stock dropped in price first, then jumped. I used that jump to reduce my position. I don't expect REITs prices to tank, there is still time to gradually reduce exposure. But it must be done.
Disclosure: I am long AGNC, NLY.
Additional disclosure: Positions can change any time.