TAKING STOCK: Approach mortgage REITs with caution and an eye on the Fed

Dear Mr. Berko:

We're 77, and we've worked all our lives. I served in Korea and have a purple heart. We vote every year, always pay our taxes and mortgage, raised four children (two of whom are recently unemployed), saved money for our retirement and were good citizens.

Together, we collect $2,106 in Social Security and a pension of $778, which was reduced early last year. We have savings of $278,000, which was paying us $15,000 in CD interest. We were getting along just fine until our renewal interest rates fell to 1 percent.

Since then, we cut back a lot. We sold one car; cancelled one cell phone and a land line; stopped our tithing; started buying cheaper, off-brand foods; cut our prescription pills in half; got a cheaper cable package; started setting the thermostat higher in the summer and lower in the winter, etc.

We've talked it over with some friends of ours at the VFW hall here in town, and we're all very concerned about the direction of the economy. What can we do with our $287,000 to get more income with minimum risk? Because the Fed has said it will keep rates at zero for the next two years, would you buy some of the mortgage REITS that yield 13 to 25 percent? Which REITs would you buy?

And since the Fed has raised the debt ceiling and will raise it again soon, where do we put money to protect against inflation? We don't want to buy gold or the like because it doesn't pay dividends. What do we do?

GB, Durham, N.C.

Dear GB:

Assume you come home from a VFW dinner on Wednesday night to find that there has been a sewer backup and the waste is up to the ceilings.

Well, what do you do? Do you raise the ceiling or pump out the effluent? This is the risible situation that the super committee of 12 (six Democrats and six Republicans) faces today.

The truth is, Congress has never failed to raise the debt ceiling, and it'll be raised again and again because the voters demand it. The majority of American families do not pay federal income taxes. And as I've said before, a democracy whose voters discover that they can vote themselves largess from the public treasury is a democracy doomed to failure.

If I was certain the Federal Reserve would keep interest rates near zero for two years, I'd buy Annaly Capital Management (NLY-$17.47), yielding 14.8 percent; Chimera Investment (CIM-$2.91), yielding 17.8 percent; American Capital Agency (AGNC-$20.92), yielding 18.8 percent; Hatteras Financial (HTS-$25.52), yielding 15.6 percent; MFA Financial (MFA-$6.87), yielding 14.7 percent; Anworth Mortgage (ANH-$6.75), yielding 14.9 percent; and Invesco Mortgage Capital (IVR-$15.21), yielding 25.2 percent.

But I don't trust the Fed. Today, the Fed has gotten political, making decisions largely influenced by members of Congress and the administration. I'm told that Federal Reserve Chairman Ben Bernanke didn't approve of the cash-for-clunkers program. He knew it would be only a short-term fix. But the administration and Congress prevailed.

Bernanke didn't want to implement quantitative easing, better known as QE2, but the administration and Congress wanted their way. Bernanke believed that QE2 would be a Band Aid, and he didn't want to bail out the banks without the bondholders sharing a portion of the pain. He was overruled by the administration and Congress.

Here's my suggestion: Invest $15,000 in each of the seven mortgage REITS listed above. You will earn $16,000 in dividend income, which is a bit higher than past earnings on your $278,000 in CDs.

Because I don't know if the Fed will keep rates low for two years, I want you to place a good-'til-cancel stop order marked "do not reduce" on each of those seven mortgage REITs at 10 percent below your purchase price. When the Fed raises rates, those REITs will drop like a rock from a high Alp. But you'll have protected your position with the GTC order, which will be immediately executed at the market when rates fall to your predetermined selling price.

This will give you some breathing room for a while. So, after the Fed allows interest rates to rise and seek their own level, you can begin to purchase 5 percent CDs again. Meanwhile, keep the remaining $173,000 liquid and watch my column over the next 18 months for some income ideas you can add to your portfolio today.

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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.

© 2011 Creators Syndicate Inc.

Published: Mon, Oct 3, 2011

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