At the end of January, I took a small position in Capstead Mortgage Corp (ticker symbol CMO). Capstead is a mortgage Real Estate Investment Trust, or REIT. REITs are companies that own real estate that they typically profit from. Capstead has three major things going for it. First of all, with a P/E ratio of around 14, CMO has a pretty nice valuation compared to the rest of the market. Secondly, CMO stock has some pretty major upward momentum in its chart:
Assuming that CMO’s support line holds its recent test the past two days, the stock will remain in a very tight, clearly-defined upward channel.
Lastly, anyone who has read more than a couple of my posts knows that I am a sucker for a big yield, and, at about 9.7%, CMO had just that.
If you are considering investing in CMO or any other REIT, you first need to read about the special tax rules for REITs. Specifically, REITs pay distributions rather than dividends. This distinction means that, under certain circumstances, REIT distributions are taxed as income rather than capital gains, which can make a difference when it comes to tax rate. That’s pretty much all I’m going to say about that because I’m already putting myself to sleep. The bottom line is this: if you are going to own a REIT, make sure you first fully understand the tax situation.
Finally, CMO is specifically a mortgage REIT, meaning that it invests in mortgage-backed securities. If you are more than five years old, the phrase “mortgage-backed securities” might send a chill down your spine because of the mess that these instruments caused in the economy back in 2008. Am I aware of everything that is going on behind the scenes with CMO’s holdings? Nope. But I understand the gist of what they are doing, and most importantly I set a stop loss order to limit my losses in case a sudden rise in interest rates or any sub-prime lending shenanigans causes the stock to tank. But until such an event occurs, or at least until CMO breaks out of the bottom of it’s beautiful upward channel, I will relax and collect my 9.7% dividend! Er, I mean distribution…