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Where to Get 17% Interest – Safely

By Dr. Steve Sjuggerud
Friday, June 4, 2010

I know the promise of 17% interest – safely – is ridiculous...
You should be skeptical. Interest rates that high must be either:
1) not possible (a lie of some sort is hiding in there) or
2) in an extremely risky investment.
You should be even more skeptical about rates that high in today's world... at a time when your bank is paying you less than 1% on your deposits.
But I assure you, what I'll share with you today is real and very safe... It's all thanks to government foolishness.
Today's idea is from one of the most foolish and costly government guarantees ever... the U.S. government backstopping the majority of American home mortgages.
You might not be aware of it, but the U.S. government guarantees most mortgages in America. In other words, if a homeowner doesn't pay his mortgage, it's the government's problem.
The government guarantees bankers and investors won't be at risk. It does this by buying mortgages from banks. It's a dumb deal for the government, but a brilliant deal for the banks and investors. And it means we can collect 17% interest, safely. Let me explain...
Bankers are smart... They try to only write mortgages they can immediately dump off on the government. What does the government do with the thousands of home mortgages it's bought? It packages them up and – importantly for our story here – it adds a 100% government guarantee... Then it sells those packages back to the banks.
I hope you can see it... These packages of government-guaranteed home mortgages are easy money for banks and investors.
Hatteras Financial (HTS) is a simple business. It only invests in these 100% government-guaranteed mortgage packages.
Thanks to the Federal Reserve cutting short-term interest rates to near zero, Hatteras can borrow money at the lowest rates in its history. It pays just 1.5% interest to borrow money. And it can invest it in mortgages that are guaranteed by the government at a much higher rate (near 4%). So right now, Hatteras is now making a fortune...
Analysts expect Hatteras will earn a profit of $4.70 per share in 2010 on its simple business of investing in 100% government-guaranteed mortgages. Hatteras, by law, pays out basically all of its earnings in the form of dividends. Based on its current share price of $28, that's a 17% dividend yield – all from boring government-guaranteed mortgages!
Hatteras is legitimately earning and paying out huge dividends by doing two simple things:
First, thanks to the Fed, it is borrowing money for next to nothing – about 1.5%. Second, the company puts that money to work in government-guaranteed investments paying 4%.
This "Goldilocks" situation – where the government is accidentally helping on both halves of the Hatteras business model – will definitely not last forever. I think we have a year... possibly less.
You see, if the Federal Reserve starts raising interest rates, then Hatteras' cost of borrowing money will rise... so the interest "spread" will shrink... and therefore the dividends these companies can pay out will shrink.
But the Fed is too scared to act – the world economy is too fragile. I don't think the Fed will raise rates for the rest of this year.
Buy Hatteras Financial right now... and collect 17% dividends. Plan on holding for a year.
I told my True Wealth subscribers to buy the stock two weeks ago – when it was trading for under $25. They're sitting pretty now... The stock is around $28 today. I told them to sell it if it gets near $32 per share. You should too. You'll have a nice capital gain at that point AND you will have earned big dividends, safely.
A safe 17% dividend and the potential for a nice capital gain... only the government could accidentally create such a fantastic opportunity. Take advantage of it.
Good investing,

Further Reading:

For another big-income idea, check out Tom's recent essay on cashing in on volatility. As he explains, "You can generate a reliable 15% income stream" while you wait for volatility to fall. Get the full story here: How to Make 15% Dividends and 50% Gains in a Turbulent Market.

A few months back, Tom told DailyWealth readers about one of his favorite dividend-stock "cheat sheets." This list contains "stocks that relentlessly raise their dividends every year." Get the official name of the list and where to find it here: This Cheat Sheet Contains the Best 212 Dividend Stocks in America.

Market Notes


On Wednesday, we looked at diesel engines for clues regarding the global economy. Today, we look at the world's manufacturing engine: China.
Since freeing up its economy in the early 1980s, China has become world's workshop. Last year, it surpassed Germany as the world's top exporter of goods. This manufacturing growth has vaulted China into the No. 2 spot in crude oil consumption and the No. 1 spot in copper and iron ore consumption.
All of these "world's top" titles make it a critical market to monitor. As we detailed last month, worries about China's overheated economy and real estate malinvestment sent the "Dow Industrials of China," the Shanghai Composite index, below its September 2009 low and into bear market territory.
Since that horrible stretch, the Shanghai index has held steady in the 2,600 range. The bullish crowd needs this small "toehold" level to hold up under the selling pressure. A break below 2,600 and into the low 2,000s will be an awful signal of what's to come for the world's workshop.

The Shanghai Index needs to hold the 2,600 level

In The Daily Crux

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