Saturday, October 22, 2011

Roth IRA almost rolled over, now what to buy?

I've filed the paperwork for the conversion for my roth from a mutual fund company over to a discount brokerage.  I'm looking at about another week to 10 days before the money transfers.  Until the transfer is complete, I'm trying to figure out how I want to invest the money.  We're not talking about a lot of money here; after combining both the transferred cash and the new contribution, somewhere around 7k, so my initial investment will probably only be in one thing; with future contributions being used to purchase other things.

My initial idea was to purchase shares of an mREIT.  These are companies that make money by financing real estate.  In essence, they are borrowing cash at short term (smaller) rates and then lend the cash for mortgages at long term (higher rates), but it is somewhat more complicated than this, as a lot of times they're just buying mortgages and re-securitizing them to sell to another mREIT or some other entity.  The other thing about mREITs that is appealing is that they must pay out 90% of their earnings to shareholders in the form of a dividend, so yields can be quite high.

I currently own one mREIT - Chimera (CIM) (which invests primarily in non-agency (non-governmnet) backed mortgages in my taxable account.  These are inherently riskier investments, as we're all aware with the risks of real estate investments these days, but it currently yields close to 18%.  I still think this a good buy right now, however I think I'm going to invest with another mREIT.  A roth IRA is a good place to invest in one of these, as the high yield is protected from taxation.  The two I'm currently considering are as follows:

Annaly Capital (NLY) is sort of the parent company of chimera, except that it invests in agency backed mortgages, making it a safer play.  Its currently trading around 16 dollars a share, with a dividend yield right at 15%.

Armour residential reit (ARR) also invests in agency backed mortgages, but it focuses on residential real estate.  Its currently trading at 6.78 per share, with a dividend yield at 19.4%.  I should mention that ARR is a fairly new company, probably riskier than NLY, and recently trimmed its hefty dividend by 8.5%.  I feel though at this price, its a great buy, as the book value is 7.11 per share.

The grand idea here with my roth is to initially invest it in high risk, high yielding stocks, then step down in both yield and risk with future purchases.

What do you think?

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