3 Best Stocks for Investing in Mortgage REITs

By Markets Fool.com

Mortgage real estate investment trusts, or mREITs, have an unfortunatetendency to grow too rapidly and take ontoo much risk, putting their very existence in jeopardy. For investors who hope to capture the big dividends mREITs offer -- yields that can soar above 10% -- you need to focus on companies that are built to last. The three below fit this bill.

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1. Annaly Capital Management
If you want a company that can last, why not start with a company that has lasted? Annaly's CEO, Wellington Denahan, said it best during the company's 2014 third quarter conference call:

Since 1997, we have operated through many challenging up-market environments, and are respectful of the lessons learned and the opportunities they have presented. We have paid out $12 billion in cash dividends since then, delivering a total return to investors three times that of the S&P 500 during the same period.

Currently yielding 11.5%, Annaly has been around since 1997, which makes it one of the longest-standing mREITs. One of the chief reasons Annaly has survived while others have perished is because of the assets it focuses on.

Annaly invests predominately in "agency" mortgage-backed securities-- residential mortgages packaged into bonds.The beauty of these assets is that they are insured by Fannie Mae or Freddie Mac, and are thus backed by the full faith and credit of the United States government. This protects Annaly from credit risk, or the risk that its assets will default.

The mixture of focusing on high-quality securities and having a proven track record makes Annaly a good bet to payout that massive yield for years to come.

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2. Two HarborsInvestment Corp.
During the company's analyst and investor day this past March, Two Harbors' CEO, Tom Siering, suggested, "We have a mission-based strategy [...] we want to be the best mortgage REIT that exists."

Since going public in 2009, Two Harbors has attempted to follow through on that mission by creating one of the most unique and diverse portfolios among mREITs,a strategy that has helped the stock generate a total return of 153% over the last five years. But this process did not happen overnight.

Siering said, "When we started, we had five [full-time employees] and today we have over 100 employees." This investment in manpower has allowed Two Harbors to expand its capabilities beyond what most mREITs can offer.

For example, starting in 2013, the company has been creating relationships to acquire residential mortgage loans directly from originators (brokers and bankers), package those mortgages into securities, and create their own unique assets. Also, in November 2014, Two Harbors announced that it had added a commercial real estate team so it could expand beyond residential mortgages and begin investing in commercial mortgage debt.

The risks facing mREITs, and the assets they invest in, are constantly changing. Two Harbors' ability to adapt and capture a wide range of opportunities makes it a great candidate to continue to perform over time.

3. Starwood Property Trust
As a commercial mREIT, Starwood Property is a different animal than Two Harbors and Annaly. Starwood Property is a specialty lender, and actually makes loans to businesses for commercial properties.

These are often large and complex loans that many companies do not have the capital or expertise to make. Also, Starwood Property is less regulated than banks,allowing the company to be more flexible in terms of lending additional money and in the speedat which it can executeloans. The combination of these factors creates a layer of competitive advantage.

Also, the company is a member of the Starwood family, which includes ahome builder, a regional mall operator, an owner of single-family homes, and Starwood Hotels, all of which aremanaged by Starwood Capital, one of the largest asset managers in the world. This givesthe company unique access to information, deals, and asset management.

Ultimately, by operating in a niche, and having the ability to leverage the nearly two decades' worth of proven experience ofits CEO and the vast global network of the Starwood family, Starwood Property Trust has a unique opportunity to last.

The article 3 Best Stocks for Investing in Mortgage REITs originally appeared on Fool.com.

Dave Koppenheffer owns shares of Starwood Property Trust. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.