(FORTUNE Magazine) – In the Greenberg household, our motto is that anything that appears too good to be true probably is. That holds for dividend yields as much as anything else. And that's what got me thinking about mortgage REITs. Even after posting a total return of 100% over the past two years, the Nareit Mortgage REIT index is still priced low enough that it delivers an average yield of about 13%. That means the market senses danger despite (or perhaps because of) the run-up, and I know it's just a matter of time before the bottom falls out, especially when you consider that the fortunes of all of the 20 or so mortgage REITs are tied to the fickle nature of interest rates and the economy.

Not all those specialized REITs are the same, however. To prove the point, I decided to compare Novastar Financial (NFI, $33) and its 19% yield (now the industry's second highest) with Annaly Mortgage Management (NLY, $18), which currently yields 15%. Novastar (which I have written about extensively in my column on TheStreet.com) may look attractive because of the bigger payout but comes with less security.

The companies are as different as any two mortgage REITs can be. Novastar, for example, focuses on investing in and originating "subprime" mortgage loans to people who often don't qualify for conventional mortgages. Annaly, on the other hand, doesn't make loans: It just invests in them and sticks to buying high-quality loans.

Novastar and Annaly also manage their risk very differently. Like many other mortgage REITs, Novastar uses derivative transactions like "swaps" to hedge its exposure to changing interest rates. But according to a disclosure in the company's SEC filing for the third quarter of fiscal 2002, Novastar has also entered into "derivative instrument contracts that do not meet the requirements for hedge accounting treatment," suggesting that the company may be utilizing more complicated hedge instruments. For the first nine months of the year, the realized loss from those transactions was $20 million. "Investors should be especially on the alert for managers who become more aggressive in their use of derivatives for speculative gain," says accounting professor Charles Mulford of the Georgia Institute of Technology. By contrast, Annaly uses no derivatives. "We have determined in the past that the cost of these transactions outweighs the benefits," the company states in its 10-K.

Another difference in the companies is their track record on making dividend payments during a downturn. During the industry's last upheaval, in the late 1990s, Novastar suspended its dividend completely two times. Annaly, in the same period, merely trimmed its dividend by a few cents twice before restoring or raising it. Perhaps that's because Annaly is much more efficiently run. With its low overhead, Annaly needed just 6.8 cents in operating expenses to produce each dollar of dividend in the fourth quarter of 2002; Novastar required an industry high of $1.75.

Most important, however, is credit risk. I asked Novastar CEO Scott Hartman in an e-mail (he declined to be interviewed by phone) why investors shouldn't worry about a repeat of the late 1990s, when the company not only suspended its dividend but also saw its share price crater from $20 to less than $3. He wrote simply, "I believe we have done a good job of managing the risks in our business--credit, interest rate, and liquidity."

Annaly, meanwhile, prides itself on its cautious approach. The company is so conservative, in fact, that CEO Mike Farrell says he turned down an offer from underwriters to raise $500 million through the sale of new stock last year. "We got criticism for not taking that money," he says. Had he taken the dough and put it in the mortgage market, Farrell says his fourth-quarter dividend could have been much higher than 68 cents, but at a price--much of the $500 million would have to have been sunk into ultimately lower-yielding investments. No wonder only 3% of his company's float is in the hands of short-sellers, compared with more than half of Novastar's.

Underscoring Annaly's reputation for security in a risky sector is that one of its biggest fans is Jim Grant of Grant's Interest Rate Observer, who typically zeroes in on financial stocks ready to blow up, not go up. He calls Annaly the "mortgage REIT with the highest peace-of-mind-adjusted yield." I'd agree. As for Novastar, let's just say I wouldn't give up my beauty sleep for its yield.

Slip of the brain: In my column about Israeli stocks ("A Risk Worth Taking," March 3), I erred in saying money manager Richard Mashaal was from Montreal; he's from Toronto. And his fund hasn't produced an average annual return of 36%; rather, that is the overall return since its inception in 1997.

Herb Greenberg is a senior columnist for TheStreet.com. Questions? Comments? Contact him by e-mail at herb.greenberg@thestreet.com.