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2013 - the year in which the mortgage real estate investment trusts (mREITs) completely fell apart and now everyone is under water in their investment in the sector. At least, that's what I keep hearing, regardless of when people claim to have bought the stock. My two favorite mREITs are the behemoths in the space, Annaly Capital Management (NYSE:NLY) and American Capital (NASDAQ:AGNC). Both are at multi-year lows. Although 2013 has been damaging, I believe the worst is probably over for these stocks, At least, that is my opinion after covering these stocks for some time. This is especially true given the most recent Q2 report from NLY and the most recent AGNC Q2 report. Things seem to be improving. When considering their performance, I have to ask - can so many investors be underwater? Those who follow my work know that I have built a position on the way down as they have absolutely plummeted in 2013. The reason for doing this is because much of the sell-off was in response to three key concerns. First was the fact that the Federal Reserve may slow or cease its mortgage asset purchases sometime this year. Second was the fear that rising interest rates will crush portfolio holdings of the mREITs. Third, the last few quarters were worrisome. I believe the Fed is not to be worried about, rising interest rates aren't a complete death sentence and finally, quarterly performance has leveled off. Furthermore, I believe in the power of compound interest. In this article, I will offer a simple analysis to show that most who claim to be under water on AGNC and have been reinvesting dividends over time have not lost anything, unless they have purchased in the last year when prices got ahead of themselves. In fact, anyone holding the stock for more than two years should be up.

There are two approaches to owning high yielding stocks. The first is to simply collect income. In this strategy an investor buys a set number of shares in a company and simply collects the dividend and spends the cash as if it were income from any old source. The second approach, and the one to which I generally subscribe, is to reinvest dividends to buy more shares over time (through say a DRIP plan) and compound one's investment. In the case of AGNC, I know many who started getting involved in 2009 and 2010. Some of these folks have insisted they are underwater. However, had they reinvested their dividends and not sold any shares, I will call their bluff. Table one below illustrates an example with a $10,000 investment made at the beginning of the summer of 2010.

Table 1. Complete Dividend History And Illustration of Compounded Reinvestment Of A $10,000 Purchase of American Capital Agency Shares On June 21, 2010.

Ex Dividend Date

Dividend Paid Date

Dividend

Share Price ($)*

Number of Shares Reinvested**

Total Shares

6/30/2008

7/29/2008

$0.31

15.30

9/25/2008

10/10/2008

$1.00

15.26

12/29/2008

1/26/2009

$1.20

20.38

3/31/2009

4/27/2009

$0.85

17.15

6/30/2009

7/27/2009

$1.50

23.78

9/30/2009

10/27/2009

$1.40

26.45

12/29/2009

1/26/2010

$1.40

26.38

3/29/2010

4/28/2010

$1.40

27.74

PURCHASE DATE:::: June 21, 2010

28.39

352.2367

6/28/2010

7/28/2010

$1.40

28.24

17.4622

369.6989

9/24/2010

10/27/2010

$1.40

28.16

18.3799

388.0788

12/29/2010

1/27/2011

$1.40

28.84

18.8388

406.9175

3/21/2011

4/27/2011

$1.40

29.04

19.6172

426.5348

6/21/2011

7/27/2011

$1.40

29.10

20.5206

447.0554

9/21/2011

10/27/2011

$1.40

27.60

22.6767

469.7321

12/20/2011

1/27/2012

$1.40

29.33

22.4216

492.1537

3/5/2012

4/27/2012

$1.25

31.00

19.8449

511.9986

6/19/2012

7/27/2012

$1.25

35.12

18.2232

530.2218

9/19/2012

10/26/2012

$1.25

32.63

20.3119

550.5336

12/24/2012

1/28/2013

$1.25

31.87

21.5929

572.1266

3/18/2013

4/26/2013

$1.25

32.96

21.6978

593.8244

6/26/2013

7/26/2013

$1.05

21.87

28.5101

622.3344

*Share Price At Open **Based On Reinvesting At Opening Share Price

As shown in the table, the complete dividend picture for AGNC since inception is provided. I lay out a hypothetical example of a $10,000 investment in AGNC on June 21, 2010, at the open of trading for $28.39. This would have been good for over 352 shares. The first ex-dividend date would have been a week later with a dividend of $1.40 paid on July 28, 2010. Assuming the dividend was reinvested at the open of trading when shares were at $28.24, another 17.46 shares would have been acquired, raising the total shares held to over 369. Repeating this process over a three-year period up to the most recent dividend paid last month of $1.05 would result in the same individual now possessing over 622 shares. Now, it is no surprise that with the share price right now being at $22.50 we are far below our original purchase price of $28.39. If this was a stock that paid no dividend, we would be down 21% on our money. However, due to the power of dividend reinvestment, our 622+ shares can now be sold at $22.50 each for a total of $14,002.52, less any broker commissions. Our initial investment was $10,000. Therefore, we have made over $4,000 even though the share price is down 21% from where we bought it. In other words, we have a 40% gain.

This analysis shows that it is near impossible to be down on an investment made in the summer of 2010. Just for informational purposes, I ran the numbers again (data not shown) assuming a purchase was made at $30.09, the high for the year 2010 on September 21. Therefore, a $10,000 investment would have generated a buy of 332.3363 shares. Catching the first dividend (ex-dividend September 24, 2010) and reinvesting up until the most recent dividend paid in July 2013 would result in owning approximately 559.4 shares. These shares can be sold today at $22.50 each for a total of $12,586.50, less broker commissions. This translates to a 25% gain, whereas a stock that paid no dividends would result in a loss of $7.59 per share, or 25%.

Limitations/Assumptions

This model has a few notable assumptions. First, I utilized the opening price on the day the dividend was paid to calculate the number of shares purchased with said dividend. Ideally we would want to have exact data for such reinvestments, however certain brokers may reinvest at different prices. A different result may be obtained depending on the actual prices utilized. However, in no way is this method a large overestimation of the actual gains. It may even be an underestimation. The other assumptions are that the investor never added to or reduced positions over time, which in reality may be unlikely, but the illustration still shows how strong the power of reinvested dividends can be.

Conclusion

For those underwater in their investments, keep reinvesting dividends. It may take time for the macro environment to return to a highly favorable situation like we have from 2010-2012. However, not reinvesting dividends will result in missed opportunities for compounding one's investment. For those who claim to be underwater on their investments that they purchased in 2010 or earlier (who have reinvested dividends), this simple analysis suggests that is not the case, and rather you are up, significantly.

Disclosure: I am long AGNC, JMI, MTGE, NLY, WMC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: American Capital Agency: Harness The Power Of Compounding To Prevent Losing Money