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'TWO' Smart Ways to Participate in the Rental Housing Boom

Tickers in this article: NLY TWO
NEW YORK ( TheStreet) -- Just as the word on the Street says that the Federal Reserve is telling member banks to pick up the pace on lending, we have a chance to buy two companies that are poised to profit from their generosity.

To make matters more exciting, one of these companies, Annaly Mortgage (NLY) just announced after the markets closed on Tuesday that its board has authorized the real estate investment trust to buy back as much as $1.5 billion worth of its outstanding common stock over a 12-month period.

That's nearly 10% of the outstanding shares based on NLY's Oct. 16 market cap of $15.32 billion. The buybacks will be made periodically on the open market or in privately negotiated transactions, the company said. After rising during Tuesday's session almost 1% it gained another 1.5% in afterhours trading.

Founded in 1997, Annaly is the largest mortgage REIT listed on the New York Stock Exchange . Its stock total return performance over the last 15 years and the amount of dividends paid are brilliantly illustrated by charts on the company's well-organized Web site .

NLY has corrected over the past month as a result of concerns about a rise in mortgage refinancing and bond prepayments. This was blamed on falling interest rates fueled by Fed policy and the Fed's massive mortgage-backed securities purchases.

The shares of NLY fell from their 52-week highs of $17.75 on Sept. 12 and corrected to an intraday low on Monday, Oct. 15 of $15.27. That's a gut-wrenching fall of 14% in a little over a month and not what income-oriented investors are used to.

A telephone interview and report by Bloomberg with NLY's co-CEO Wellington Denahan-Norris helped put things in perspective and shed light on the correction of mortgage REITS like NLY.

The report stated that, "Mortgage REITs are losing investors who have been attracted by average annual dividend yields currently at about 13%, or almost seven times that of Standard & Poor's 500 companies. The firms use cash raised through share sales and borrowed money to invest in government-backed mortgage securities, housing debt at risk from defaults, or both."

The report also reminded readers that while dividends are bound to fall somewhat, they're still well above those of competing investments such as high-yield corporate bonds. Many investors are shocked to see these yields on so-called "junk bonds" being pushed lower by global central banks who are intending to stimulate their economies. Junk yields fell to a record low 6.95% last month, according to a Bank of America Merrill Lynch index.

"It's not just at the mortgage REITs where the returns in this market are being put under assault," New York-based Annaly's Denahan-Norris said Tuesday in the Bloomberg telephone interview. "It's the general global landscape where you have an incredible mispricing of risk that's being delivered at the hands of academics at the central banks of the world."