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I have been following American Capital Mortgage (NASDAQ:MTGE) since it's inception, August 4, 2011, but did not purchase my first tranche until May 24, 2012. It is a small cap hybrid mortgage REIT with 10% non-agency securities as of the most recent earnings report . For the first full year of operation, the company delivered a 41% Economic Return to shareholders. My articles 16% Yield in Retirement: American Capital Agency Corp; Is American Capital Mortgage's 16% Yield A Substitute For Agnecy mREITS?; and Invest in Homes With American Capital Mortgage Investment Corp. have shown my progression from agency stock American Capital Agency (NASDAQ:AGNC) to a preference for hybrid stock American Capital Mortgage with it's higher total return. There has been some controversy over mREITs since QE3 was announced by the Federal Reserve last fall and many mREITs suffered stock price corrections. However, MTGE held up very well and with their most recent earnings announcement, they went for another secondary offering (priced about $25.65) which seems to have gone well, since the stock price has remained about constant.

(click to enlarge)

It can be seen from the chart that the one day dip for the secondary offering is rapidly being compensated for ( I put in my order just below the offering price at $25.63 and have not been able to get the stock yet).

I have determined that the maximum allocation for my portfolio to financial stocks will be 25%. Of this, 20% will be split between the 2 mREITs AGNC and MTGE. The maximum for any stock in my portfolio will be 15%. At present, 18.53% of the portfolio is in financial stocks with 13.18% in mREITs. I use the dividends from these high yield positions in financial stocks for maintaining my overall cash position and the purchase of other dividend paying stocks.

Over the past year I dripped these positions, but as they neared the maximum sector allocation, I began taking the dividends in cash. Below is a spreadsheet showing a $10,000 investment in MTGE as if dripped from the first dividend received:

StockDate of reinvestDiv Rate# SharesDividendDrip price# Shares purTotal ValueCurrent Yield
Totals  722.23$2,969.67 132.61  
 12/24/12$0.90696.33$626.69$24.1925.91$17,470.8214.88%
 09/19/12$0.90672.35$605.12$25.2423.97$17,575.2614.26%
 06/19/12$0.90647.28$582.56$23.2425.07$15,625.4515.49%
MTGE03/13/12$0.90622.36$560.12$22.4724.93$14,544.4816.02%
 12/20/11$0.80596.57$477.26$18.5125.78$11,519.8317.29%
 09/21/11$0.20589.62$117.92$16.966.95$10,117.884.72%

It can be seen from the table that the total return over the 5 quarters was $7470.82 or 56.26% per year. A chart of this is shown below:

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Conclusion: In these times of Zirp, QE infinity, fiscal cliff and governmental budget ceiling fights, global markets are extremely volatile. For many retirees, it is frightening to see their portfolios of funds saved from a lifetime of hard toil, risked in the market, especially if one was used to 4% yield on money market certificates (up until the financial crisis). My children and their children have suffered from layoffs, lack of lending to small businesses by banks and high gasoline and food prices. I feel that it is my responsibility to help them in their time of need. When my generation was working, we had defined benefit pension plans to look forward to. Now, these are few and far between.

It is up to each individual to determine their own level of risk and act upon that. Many retirees would not allocate 25% to financial stocks, especially after being burned in the financial crisis as I was with bank stocks. One must do their own due diligence with an eye on the risk that they are willing to endure.

Source: 41% Total Return With American Capital Mortgage Investment Corp.