A Stock to Sell: This mortgage investment firm has a high yield but even higher risk

Investment Counsellor
Every Monday we feature “A Stock to Sell” as our daily post. With every stock we recommend as a sell, we give you a full explanation of why we advise against investing in the stock at this time.

Timbercreek Senior Mortgage Investment Corp. (symbol MTG on Toronto; www.timbercreek.com), is a mortgage investment corporation.

Mortgage investment corporations, or MICs, invest in pools of mortgages and distribute most of their profits to their shareholders. Some MICs yield 6% or 7% or more annually. They sound like conservative investments because they invest in mortgages rather than equity.

However, mortgages vary widely in their investment quality and risk. MICs can earn high profits because they take on riskier mortgages.

Timbercreek Senior Mortgage Investment Corp. yields 6.6%.

The conservative advantage

Conservative investors have one big advantage—when you guard your money, you’re ready for the tremendous opportunities that appear when the market moves up. Opportunities like Pat McKeough’s Safety-Conscious Stock of the Year for 2013. Bank of Nova Scotia proceeded to hit all-time highs, rising by as much as 12.9% while rewarding investors with the generous 3.9% dividend yield. Pat made it his Safey-Conscious Stock of the Year again for 2014 and it’s up over 20% since he picked it this time.

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Investment advice: Higher interest rates on MIC loans = higher risk

Conservative mortgage lenders, such as banks and mortgage funds, mainly invest in top-quality first mortgages on commercial, industrial and/or residential properties.

Timbercreek’s loans are primarily interest-only and are used to bridge a period up to three years for such items as repair and redevelopment or the purchase of another property, with a loan-to-value ratio up to 70%.

Interest rates on MIC loans are higher than on corporate or government bonds with the same term to maturity, because the risk is higher.

Managers of MICs typically believe they can manage the risk in their investments by paying close attention to certain factors. However, lending to higher-risk real estate borrowers mainly tends to be profitable during real estate booms, because that’s when property prices tend to go up. As well, real estate is a cyclical field. Even if you invest at the start of a boom, it will eventually give way to a slowdown or setback that can last for months or years.

MICs generally expose investors to risk that is above average or worse, so we advise against investing in them.

We see no reason to make an exception for Timbercreek Senior Mortgage Investment Corp., so we advise against investing in it. If you own the stock we think you should sell.

Tomorrow we report on a top stock in Canada’s resource sector that has gained over 50% in the past year.


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