2 High-Yield Dividend Stocks to Buy If the Fed Cuts Rates
The Federal Reserve this week is expected to approve the first of what will likely be several prime lending rate cuts over the next couple of years in its efforts to keep the U.S. economy on an even keel moving forward. Perhaps no sector of that economy is set to benefit as much as the housing sector, and more specifically mortgage REITs (real estate investment trusts).
In simple terms, mortgage REITs are specialized companies that invest in mortgage-backed securities, or MBS. Taking the explanation to another level, these REITs fund these MBS investments using short-term financing vehicles, such as repurchase agreements (repos), that they then hedge out to more closely match the duration of the MBS they own. They ultimately make money through the spread in interest rates between their funding costs and the coupons of their MBS investments, which they further boost through leverage.
The investment income mortgage REITs generate is then largely paid out to investors in the form of dividends (as required by the tax structure these REITs operate under).
Source Fool.com
