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Two Harbors' 14.5% Dividend Yield Is Worth It

Published Wed, 29 May 2019 02:22:23 -0400 on Seeking Alpha

Two Harbors Investment Corp. (TWO) currently has a dividend yield of about 14.5%. The average dividend yield of comparable funds is 11%, according to Bloomberg terminal. Is the extra 3.5% worth it? Does that extra 3.5% come with extra risk? The following article will explain TWO's investment strategy and why I'm bullish on the stock. The extra dividend yield provides a sufficient margin of safety for me even with the current headwinds plaguing the mREIT sector.
Data by YCharts
TWO's Portfolio
TWO has a relatively simple investment strategy. It mainly uses agency fixed-rate MBS and mortgage servicing rights, or MSRs. TWO also holds a smaller amount of non-agency MBS mainly comprised of sub-prime mortgages.

(Source: TWO Q1 2019 Investor Presentation)
These assets naturally balance each other out. Agency MBS typically performs well with interest rate cuts and a steeper yield curve. MSRs typically perform well with interest rate increases.
MSRs are the rights to service a mortgage. Typically, the longer a mortgage is serviced, the more payments are collected, which in turn increases the value of the MSR. This means factors that decrease the life of the MSR are a risk:
Refinancing Default Refinancing is linked to interest rate trends. As interest rates rise, the opportunity to refinance a home disappears. The number of homes that are currently able to be refinanced has been dropping as interest rates rise.

(Source: New Residential... Read more

Stock name Last trade   P/E Earnings/Share Dividend/Share Dividend yield
ANNALY CAPITAL MANAGEMENT 9.21   0.0 -1.59 1.20 13.16
AMERICAN CAPITAL AGENCY 16.92   1.0 0.01 1.92 11.44
CHIMERA INVESTMENT 19.21   15.0 1.28 2.00 10.56


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