Flatter Yield Curve
Bose George, Jade J. Rahmani and Ryan O'Steen, analysts at Keefe Bruyette & Woods in New York, wrote in a Dec. 12 report on their outlook for 2012 that "we expect investment opportunities for mortgage investors including the mortgage REITs to remain reasonably attractive" next year.
"The main driver is slowing prepayments relative to the back half of 2011," they said. That "should help offset a flatter yield curve," or narrower difference between the short- term rates at which REITs borrow and the long-term yields on their investments, the analysts said.
Gundlach oversees the $14.9 billion DoubleLine Total Return Bond Fund, which has returned 9.4 percent this year, primarily investing in mortgage debt.
Dividend yields for mortgage REITs are almost 15 percent, so even cutting them in half would leave investors being paid about 5 percentage points more than 10-year Treasuries, said Jay Diamond, a managing director at New York-based Annaly Capital, the largest of the companies.
"Dividend yields are pretty attractive right now and if you take an extreme case, which I want to stress is not what I'm predicting is going to happen, you're still doing pretty well," he said in a telephone interview. "Since inception our annual return to investors has averaged over 14 percent and most of that is from cash dividends."