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Sixteen-Percent Dividends... from Residential Real Estate? Yes!

By Dr. Steve Sjuggerud
Tuesday, April 10, 2012

With a 16% dividend, Two Harbors 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:  
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 (NYSE: TWO) is a no-brainer.
Good investing, 

Further Reading:

Right now, Steve is taking advantage of the housing market in another way – by personally pursuing some of the greatest values he's ever seen. "With housing more affordable than ever and mortgage rates lower than ever," he says, "we have incredible upside potential." 
Brett Eversole is also looking to take advantage of cheap housing prices. In his hunt for a good buy, he learned something shocking about the real estate market... "From my experience, this area is a minefield," he writes. "But you only need to find one gem to get an unbelievable deal." Learn more here: Here's How to Get the Best Deal Possible on Housing.

Market Notes


Crude oil bears just got a bit of "price confirmation" of their thesis...  
In the past few months, a handful of market analysts have written about the possibility of a big correction in crude oil. These "bears" note declining U.S. demand and historically high excess inventories. They also cite the large amount of bullish crude oil bets speculators are carrying right now (which is a bearish contrarian signal).
Folks betting on an oil decline have suffered recently. The U.S. crude oil benchmark, West Texas Intermediate, climbed from $82 a barrel in October to $110 a barrel in February (34% gain). But in just the past week or so, crude oil has started moving in the bears' direction...  
As you can see from today's chart, crude traded in a tight price range from late February to late March. Recent trading has produced a downside breakout from this range. Traders who believe excess inventories will depress prices now have the short-term trend on their side.
Crude Oil's Downside Breakout

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