You read that correctly, Newcastle Investment Corp (NYSE: NCT) a REIT, is currently paying around $2.88 per share dividend, that equates to a yield of 21.9% based on yesterday's closing price of $13.15 according to AOL Money & Finance data. We all know the "truism" that if something sounds to good to be true... it usually is. So why am I crazy enough to even consider such a thing? Believe me, I have been asking myself that question over the last five months or so that I have been watching this stock.

Newcastle first came to my attention through a Smart Money story written by James B. Stewart many months ago. He was discussing three stocks that he thought were worth the risk and had bought into all three. One of them was the now bankrupt American Home Mortgage (AHM) -- need I say more? The second was NCT and the third escapes my memory. Bankruptcy tends to put a damper on my investment psyche, so I left this idea alone until last month when NCT popped up on my radar screen again.

I do not remember what I was reading at the time but I started to take a closer look and found that NCT was very well diversified into all classes of real estate, with only 10% of the portfolio being in residential properties. Looking at some of the traditional metrics: the P/E is around 10, the P/S 1.3, the P/B 0.74 and the PEG ratio is listed at 0.15. All these numbers are SCREAMING VALUE very loudly. So what's the problem?

Although there are many issues associated with REITS and loan portfolios in this market, there are only two primary problems that I can see from an investment perspective, given what I have been able to learn. The first is whether this company will survive this turbulent market. And the second is whether it will be able to maintain the yield.

Before I answer these questions let me share the following information. After plowing through a few traditional reports including S&P's, which is neutral and has not rated the stock, I took the time to listen to most of the November 7, 2007 conference call and these are the highlights:

• Book value is between $15 to $16 per share after the portfolio was "marked to market."
• It expects to receive $1 billion in loan pay-offs in the next 12 months, which will be reinvested.
• If upon the return of capital it is not able to find new suitable deals, it will buy back stock.
• The board has authorized up to $100 million for potential stock buy backs.
• Company management bought stock personally at $27 a share and feels today's price is a bargain. They did not want to comment about whether they were buying more.
• Residential exposure is only about 10% of the portfolio and delinquencies of 60 days or greater are running under 1% and the company has nothing invested in Florida condos.
• Residential loan to value (LTV) in the portfolio is about 80% and impairment is $3 million of the $80 million value.
• Although 2006 loans are troublesome and have been marked to market, the loans from prior years are stable or out-performing.
• Commercial and Corporate debt is 74% of the portfolio in 560 loans and is performing. The commercial sector has not seen any problems.
• It has $30 million cash in the bank.
• The company has a "high degree of confidence" that the dividend will not be cut in the next 12 months

Nothing I am able to find indicates any liquidity problems, loan defaults, management issues or reason to believe this is not a healthy company. Newcastle has maintained a 23% profit margin over the last year and believes we are at the tail end of a tough market. It looks like it will survive just fine. The dividend ramped up as the stock fell. Over the last five years NCT has averaged an 8.8% yield. The 52 week stock price range is $12.15 to $33.59.

As a real estate investor I can tell you that the stock price does not reflect a reduction in cash-flow but a perception that the property or collateral supporting the loans has been marked down. That is what has depressed the stock. This means that as cash is returned and loans are paid back new investments will be based on current property values, possibly prompting the trend to reverse. There is every reason to believe that Newcastle can maintain the dividend, and over the next few years the stock price can return to to its previous highs. A less optimistic view might be that it cuts the dividend in half and the stock takes five to six years to regain its former glory.

Despite the above concerns It still seems that this is a great value. I will be adding NCT to Serious Money: Hot stocks for a cool year -- finding 8 for 2008. Look for the updates to this story as I narrow down the picks to the final eight.

To find potential opportunities and verify my track record, read Chasing Value or Serious Money.

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm.