The great utility of taxes for a government is the stream of income generated regardless of market conditions. For individual investors who do not have the power to levy taxes, one alternative for establishing their own stream of income is to exercise their right to choose investments that offer dividends. The iShares FTSE NAREIT Mortgage REIT Index Fund (PSE:REM) may turn investors away at first glance, but its healthy 17.64% dividend should give investors enough reason to pause. To begin with the basics of REIT investments, read What Are REITs?)

Reasons to Stay Away
The iShares FTSE NAREIT Mortgage REIT Index Fund invests primarily in REITs that lend money to developers and in residential and commercial mortgages. The fund just launched in May of last year. Early investors have shared the painful experience of losing more than 50% of their investment value since the beginning of the year. Foreclosures and sub-prime mortgages have led to huge debt write-downs and bank failures that have been a major component of the current financial shock. According to RealtyTrac, a real estate foreclosure property listing service, foreclosures increased 21% for the 12 months ending in September.

Why Throw Good Money After Bad?
Mortgage REIT Annaly Capital Management
(NYSE:NLY) represents more than 25% of REM's portfolio. Annaly's list of top institutional holders includes financial institutions that have managed to avoid the subprime-related debt losses including Goldman Sachs (NYSE:GS), Barclays (NYSE:BCS) and State Street (NYSE:STT). Although Annaly's focus on investing in debt securities should make investors cringe, the stock's 18.60% dividend has offered a measure of protection against the falling market. If larger institutions are still willing to hold shares of a mortgage REIT company like Annaly, there's a possibility that the dividend payout makes the REIT worth holding on to until the investment comes back into favor. Other top holdings for REM with high dividend payouts include MFA Mortgage Investments (NYSE:MFA) at 18.50% and Capstead Mortgage (NYSE:CMO) at 25.30%.

A Note of Caution
The very low volume suggests the REM fund may be difficult to get out of once an investment is made. Investors should also note that it's not certain when confidence will return to credit markets or how new regulations may change how mortgage REITs can profit for debt securities.

Final Thoughts
Dividend payments are not a guarantee and they are definitely not as reliable as taxes for securing a stream of income. The dividends offered by REM do offer investors a downside cushion and a play on the eventual recovery of mortgage securities. While now may not be the best time to consider REM as an investment, its worthwhile to keep out-of-favor investments in mind for the future.

For further reading, see The REIT Way and Basic Valuation Of A Real Estate Investment Trust.

Related Articles
  1. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  2. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  3. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  4. Chart Advisor

    How Are You Trading The Breakdown In Growth Stocks? (VOOG, IWF)

    Based on the charts of these two ETFs, bearish traders will start turning their attention to growth stocks.
  5. Mutual Funds & ETFs

    Pimco’s Top Funds for Retirement Income

    Once you're living off the money you've saved for retirement, is it invested in the right assets? Here are some from PIMCO that may be good options.
  6. Chart Advisor

    Watch This ETF For Signs Of A Reversal (BCX)

    Trying to determine if the commodity markets are ready for a bounce? Take a look at the analysis of this ETF to find out if now is the time to buy.
  7. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  8. Mutual Funds & ETFs

    ETFs Can Be Safe Investments, If Used Correctly

    Learn about how ETFs can be a safe investment option if you know which funds to choose, including the basics of both indexed and leveraged ETFs.
  9. Mutual Funds & ETFs

    The Top 5 Large Cap Core ETFs for 2016 (VUG, SPLV)

    Look out for these five ETFs in 2016, and learn why investors should closely watch how the Federal Reserve moves heading into the new year.
  10. Economics

    India: Why it Might Pay to Be Bullish Right Now

    Many investors are bullish on India for all the right reasons. Does it present an investing opportunity?
RELATED FAQS
  1. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  2. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  3. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  4. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  5. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
  6. Can mutual fund expense ratios be negative?

    Mutual fund expense ratios cannot be negative. An expense ratio is the sum total of all fees charged by an asset management ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center