Heavy insider buying at Armour Residential

To boost the average current yield in our portfolio, we are buying Armour Residential (ARR), a real estate investment trust showing heavy insider buying.

Armour invests in residential mortgage-backed securities. Mortgage REITs borrow short term and buy higher-yielding securities. The holdings in their portfolios are liquid and allow shareholders to always know the true value of their assets.

There is little credit risk here. Most of the securities carry an implied or actual AAA credit rating and are guaranteed by a U.S. government agency.
Moreover, with short-term interest rates at record lows, there is good money to be made earning the spread between short-term and long-term rates.

Using securities as collateral, MFA borrows heaps of money cheaply through overnight repurchase agreements, which currently cost less than .5% per year.

Then, using leverage, it buys mortgage-backed securities guaranteed by the federal government (or one of its agencies).

REITs must distribute at least 90% of taxable income to shareholders. That means the dividends tend to be large. In this case, the dividends are extra large. Armour is currently yielding 19.67%.

Can this yield be maintained? Absolutely. Armour is likely to earn a dollar a share this year and about 30% more in the year ahead. Profit margins are an astonishing 66%. That means the dividend is secure� and likely to rise in the next few quarters.

To top it off, the insiders have been accumulating the stock this month. Director Thomas Guba invested $275,000. And Director Daniel Staton purchased 150,000 shares, an investment of $943,000.

This is a clear indication that Armour is undervalued and likely to outperform in the months ahead. So pick up Armour Residential and place a protective stop at $5.50.