With a 16% dividend, Two Harbors (TWO) is already one of the top recommendations in my True Wealth newsletter.
But in my opinion, the story just got better…
Two Harbors recently announced it’s going to be buying single-family homes.
On its most recent conference call with investors, Two Harbors said:
[ad#Google Adsense 336×280-IA]We are targeting properties at significant discounts to replacement cost.
We intend to hold the properties we buy for investment and rent them for income… We believe the strategy will produce attractive returns for our shareholders over time.
I love it…
As you probably know from recent DailyWealth issues, I believe single-family homes are an incredible opportunity right now.
The basic story is that housing is a great value right at this moment: With mortgage rates at lows and a record “bust” in home prices, housing is more affordable than ever.
Plus, we’re at the “puke point” – banks are giving up properties at any price, just to get rid of ’em.
I also believe that the management team at Two Harbors has done a fantastic job of finding the best opportunities in real estate…
Right now, the Two Harbors portfolio is filled with bonds… Roughly half are government-guaranteed mortgage bonds, and half are non-government-guaranteed mortgage bonds. In the fourth quarter of 2011, the government-guaranteed bonds had an average interest rate of 3.5%. The non-guaranteed ones had an average interest rate of 9.7%.
Two Harbors borrows money at roughly 1% and invests it in these bonds. It’s taken advantage of the Fed (like Annaly and Hatteras), using the government guarantee. It’s also taken advantage of the foreclosure fears, making a fortune through buying very high-yield mortgage bonds.
Two Harbors is organized as a real estate investment trust (a REIT), so it pays no taxes on its real estate income… as long as it distributes that income to you in dividends. So all the rent it will earn will flow to you, untaxed. Right now, it’s paying a 16% dividend.
It will take time before single-family homes have any meaningful impact on the Two Harbors portfolio. But I like the idea for the same reasons Two Harbors does… “the potential for home price appreciation and increasing rents.”
In a zero-percent world, Two Harbors is paying out a 16% dividend. And it’s starting to buy single-family homes at “significant discounts to replacement cost.”
If you believe at all in residential real estate, Two Harbors is a no-brainer.
Good investing,
Steve
[ad#jack p.s.]
Souce: Daily Wealth