Value investing is all about gritting your teeth and buying stocks that nobody loves . . . and then waiting for the catalyst that brings the love back. It can take weeks, months, even a year or two if you have the conviction and the nerve.

We knew mortgage-backed securities were oversold to an extreme. It was a vicious cycle: nerves around credit quality raised questions about the sustainability of dividends. When risk goes up, people who want consistent income step away. Yields go up but there are few buyers.

Except for us. Thanks to our mortgage and residential REITs, we’ve locked in close to 10% in annualized trailing income. The only question Wall Street had was whether those paybacks would continue at their current level. In our view, there wasn’t much concern . . . even a cut would leave our yields well above what we’d get in the bond market.

And now that the White House is talking about buying $200 billion in mortgage bonds, these companies have a potentially huge buyer in their corner. More demand for these securities raises the market value of the REIT portfolios.

Suddenly these companies are worth a lot more. The stocks have followed. I’m pleased to say our portfolio has rebounded 4.5% YTD, with NLY leading the way. Most of those gains came on Friday, when TCPC came into focus as well.

Good news on that corner of the yield universe spilled over other areas of the Buy List. You can feel the relief. This is how catalysts work: they clear the air and shift the narrative. Sometimes there’s a bit of second guessing afterward but the tone is set.

We were willing to wait for this kind of outcome. The dividends are literally how companies incentivize shareholders to wait. We locked in a high enough level of dividends that we could roughly keep up with the S&P 500 in the long run and definitely leave bonds in the dust.

(Remember, the stock market has typically given investors about 10-11% a year over the past century or so. Locking that in with yields means we match the market on that side . . . and whatever happens with the stock price in the meantime is only a theoretical problem, something for our heirs to worry about.)

Those yields have already overcome all the downside these stocks have suffered in the last year or so. And now that the stocks are rebounding, the gap is widening in our favor.

From here, the gains stack with the quarterly cash payments. Our new strategy has broken even and now we’re making money. The longer we hold on, the higher the pile of money gets.

The only question now is whether that rate of return is high enough to give us what we need. Are dollars in the Value Authority worth the opportunity cost we pay for not deploying them elsewhere?

We never tried to keep up with the growth stocks. That’s not our function here or our goal. We’re all about a solid rate of income and a degree of long-term capital preservation.

In other words, we compete with bonds and CDs and money markets. How are we doing there? Long-term Treasury debt gave holders about 6.3% last year, counting coupon payments. That’s the benchmark we need to beat.

It was the best year in bond land since the 2020 upheavals. Meanwhile money markets are paying around 3.5% and CDs yield maybe 4% if you’re willing to lock that in. We’re making 2-3X as much from quarter to quarter and those distributions aren’t dropping.

Granted, there’s a fair amount of work left to be done on the stock pricing side. But with money coming in, we can be patient . . . especially since the prices are moving in the right direction now.

Where do we go from here? Ultimately we need to keep cycling out of our last legacy trades that don’t actually yield that much. That means WEC, which was once a standout for us but now feels like a long-term laggard.

I’m not willing to cut WEC loose yet but I would like to add a new stock to the list behind it. Arbor Realty Trust (ABR) is another REIT that focuses on apartment buildings, not individual residential mortgages. There’s no urgent White House policy here but it’s going to benefit from any downward pressure on mortgage rates.

We could buy the common stock and capture some confidence about $0.30 per share quarterly. But in this case, I’d like to lock in a smaller yield with stronger guarantees by going for the preferred stock instead. Your brokerage platform might have it as ABR-PD or ABR-E or ABR.PRE.

The charm here is that preferred shareholders get paid first and the distribution is locked in at $0.30 per share. No oscillations with operating conditions and the rate market. If management can’t pay that $0.30, the entire company is in serious trouble.

They’ll move heaven and earth to make it happens. And that means we can lock in a little less than 9% a year on this position without a lot of risk.

Granted, that’s a little LOW for us these days and it will lower our overall yield a few basis points . . . at least until it’s time to cash out on WEC. But what we’re gaining here is that clarity. Our other residential REITs dropped so hard because investors were convinced that dividend cuts were coming.

The odds of a dividend cut on ABR are higher than they are on ABR-PD. We’ll take a little less than 9% here if it helps us sleep better.

Buy ABR-PD under $18. These shares were issued at $25 par so that’s a good target. And in the meantime, we’ll make $1.20 a year here back.