Optimal Finance Daily - Financial Independence and Money Advice 3166: Cash Flow Investments: REITs and Agency Mortgages by JT McGee with The College Investor
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Jun 4, 2025 Dive into the intriguing world of mortgage REITs and discover how they deliver impressive dividend yields through strategic investments in mortgage securities. Learn about the crucial risks posed by interest rate fluctuations and gain practical insights for building a diversified, income-focused portfolio. These investments are not just alternatives to traditional fixed-income assets; they can also reshape your approach to generating income. Uncover how REITs are legally required to return a significant portion of earnings to shareholders!
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Mortgage REITs Use Yield Curve Arbitrage
- Mortgage REITs leverage short-term borrowing to invest in long-term mortgage-backed securities.
- This arbitrage on the yield curve drives their high dividend yields but also exposes them to rate risks.
Interest Rate Risks for Mortgage REITs
- Mortgage REITs face two main risks: rising rates increase borrowing costs and falling rates lead to refinancing prepayment risk.
- The ideal scenario is a slow, gradual increase in rates, balancing these opposing risks.
Enhanced Risk Management in REITs
- Despite risks, mortgage REITs today employ advanced risk management to hedge interest rate volatility.
- Leveraged REITs are safer now than several years ago due to increased industry caution and capital inflows.