With an upcoming interest rate hike cycle and with economic uncertainty, many investors might shy away from the mortgage-related real estate investment trusts (mREITs). Just don’t bother telling that to Credit Suisse, as the firm has a report that highlights favorable valuations for what has historically offered very high-dividend yields to investors.

Credit Suisse’s Douglas Harter pointed out that the mREIT subsector’s book value was flat through the month of May, and he increased his estimates on a delayed Federal Reserve rate hike scenario. Because mREITs can have volatile earnings, their dividend payments can fluctuate as well. That means the dividend yield is often a snapshot rather than a static fixed amount you might see elsewhere.

Harter’s top picks favor mREITs that are creating operating businesses and can create their investments.

New Residential Investment Corp. (NYSE: NRZ) was the first mREIT mentioned. Shares are now near $17.07, with an $18.50 consensus analyst target and a 52-week trading range of $11.44 to $17.91. Its yield is represented as being 10.4%. Harter’s last report was on May 14, and he had an Outperform rating and $19.00 price target. New Residential Investment was said to have attractive total return potential with a near-term catalyst of a dividend increase.

PennyMac Mortgage Investment Trust (NYSE: PMT) was the second top pick, and at about $18.50, it has a consensus analyst target of $21.60 and a 52-week range of $17.69 to $23.08. Its yield is represented as 13%. Harter’s last report on PennyMac was on May 6, when he said the outfit had weak earnings, but with cash flows remaining strong. Harter lowered his target to $23 from $24 in that call.

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Two Harbors Investment Corp. (NYSE: TWO) was the third on the list, with a 9.7% yield being represented. Trading around $10.69, Two Harbors has a consensus price target of $11.23 and a 52-week range of $9.60 to $11.00. Credit Suisse’s last report was May 6 on Two Harbors, with an obvious outperform rating and an $11.50 price target.

Harter said:

Trading at a 16% discount to second quarter estimated book value and yielding 12.6%, we see the mREIT sector offering an attractive risk/reward. The discount provides a cushion to the book value risk from rising rates allowing for the dividend to provide an attractive return.

Harter went on to say:

We are increasing our 2015 estimates by 1.2% and our 2016 and 2017 estimates by 2.5% on average. … The biggest change in our estimates is a delay in the first rate hike until September from June. … Our estimated rate of increase for rates remain above the market despite our change today. Should the market level of rates play out, we see additional upside to our estimates.

There was also a note on book values here. Harter said:

Second quarter to date, we see mREIT book values as being down 0.1% on the back of the 18 basis point increase in rates; hybrid mREITs are outperforming the Agency-only peers. The two key issues (in addition to credit spreads) that impact book value that we are watching are the impact of convexity and the steepening of the yield curve.

If investors want exposure to the mREIT subsector without trying to second guess analyst calls or pick individual outfit risk, there is good news. Two mREIT exchange traded funds (ETFs) cover this high-dividend arena.

The Market Vectors Mortgage REIT Income ETF (NYSEMKT: MORT) has a stated yield north of 9%, and the $23.68 share price compares to a 52-week range of $23.13 to $25.52. It has been public since late in 2011.

The other mREIT ETF is the iShares Mortgage Real Estate Capped ETF (NYSEMKT: REM). It is much more active, and its yield is stated as being above 10%. Trading around $11.65, it has a 52-week range of $11.39 to $12.94. This ETF has traded since 2007.

As a reminder, REITs are required to pay out at least 90% of their taxable income each year in the form of shareholder dividends. Mortgage REITs invest in mortgages or mortgage securities tied to commercial and/or residential properties.

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The NAREIT website lists additional information about the mREIT sector as follows:

Mortgage REITs provide financing for real estate by purchasing or originating mortgages and mortgage-backed securities (MBS) and earning income from the interest on these investments, while Equity REITs invest in real estate equity by acquiring properties — such as shopping malls, office buildings or apartments — and collecting rents from their tenants.

Mortgage REITs invest in residential and commercial mortgages, as well as residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS). Mortgage REITs typically focus on either the residential or commercial mortgage markets, although some invest in both RMBS and CMBS.

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