As US Economy Continues To Improve, Look To Mortgage Real Estate Investment Trusts For Potential Gains (NLY)

US markets open to strong gains on Friday morning as the news of growth in the US labor market and the fall of the unemployment level to its lowest point in over two years gave investors a reason to be hopeful that the United States economic recovery is indeed underway.

November saw an increase of 120,000 in Non-farm payrolls, while the unemployment rate fell to 8.6%, its lowest level since 2009.  This break below the persistent 9% seen in the last few years could serve to improve sentiment and confidence in investors and consumers going forward into next year.

News out of Europe concerning the developments in the debt crisis saga will continue to be watched closely by investors on Friday following comments made by Nicolas Sarkozy on Thursday as to his support of stricter sanctions for European budget sinners.  European leaders will be meeting next Friday to discuss improved enforcement of fiscal discipline.

News From Europe Overshadows Positive Steps In US Economy

While the developments in the European debt crisis have been taking center stage in the market, the underlying domestic economy in the United States has continued to show signs of improvement, making the chances of another recession appear to be unlikely.

US markets lately have been driven almost entirely by the news coming from the Euro zone, effectively drowning out some positive news concerning the domestic US economy.  US equities markets have become unpredictable as EU leaders have struggled to find a solution to the growing contagion in the region.

As the drama in Europe unfolds, and investors deal with a volatile market, it has become increasingly important to look for securities that offer profits from both upside potential and dividend yield.  As the US economy improves, an area for growth may be found in mREITs, a previously battered sector that may provide courageous investors with opportunities to profit going into 2012.

Buying Opportunities In Mortgage Real Estate Investment Trusts

Currently trading at $16.35, Annaly Capital Management (NLY), finances, owns and manages a portfolio of real estate related investments and pays an astounding 15% dividend yield.  Annaly Capital Management has had a rough year as it is in the financial sector, it has paid the price and is trading more than 10% lower for the year.

Mortgage Real Estate Investment Trusts, or mREITs, are levered vehicles that are subject to changes in interest rates.  As the Federal Reserve has struggled to keep the US economy afloat in the past few years, mREITs could potentially stand to benefit from the Federal Reserve’s easy money policy, while the global economy struggles with debt loads that have become significant.

There are, of course, real risks associated with investing in mREITs including the risks posed from the Federal Reserve’s Operation Twist, as well as the increase in the foreclosure rate.  The risk posed by Operation Twist could prove to be minimal, however, as historically the Federal Reserve’s program has had a .10-.20 basis point impact, too low to signal the end of profits for Annaly Capital.

The increase in the foreclosure rate may only affect Annaly Capital’s earnings a small amount due to the fact that although the rate has picked up, the increase can be credited to the backlog of unpaid mortgages that are already in existence, and may not impact Annaly Capital in any meaningful way.

As savers will most likely continue to be punished in the form of low interest rates on traditional savings accounts and CDs, it may be wise to allocate a portion of your portfolio to mREITs to generate dividend income in a low yield environment.

Annaly Capital has an average price target of $17.56, and has a three to five year EPS growth rate of 21.5%.  Combined with a 15% dividend yield, Annaly Capital could reward investors who can afford to take a long position in this sector.