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Focus of Article:

The focus of this article is to provide a detailed analysis with supporting documentation (via tables) on the best case, worst case, and "middle-of-the-road" scenario regarding American Capital Agency's (NASDAQ:AGNC) third quarter of 2013 dividend per share amount.

I am writing this particular article due to the continued high demand that such an analysis be performed. Understanding the dividend payout characteristics of this company will provide investors with an overall better understanding of the mortgage real estate investment trust (mREIT) sector as a whole. AGNC currently produces an annual dividend yield between 17% - 20%. Recently, AGNC cut its quarterly dividend from $1.25 per share in the first quarter of 2013 to $1.05 per share in the second quarter of 2013. Some researchers/analysts have begun to price in an additional dividend cut in the near future.

This article discusses the "probable" per share amount AGNC will declare in the third quarter of 2013. The probability of a dividend cut occurring for the upcoming quarterly dividend has moderately increased from the continued volatility in overall mortgage interest rates, MBS prices, and US Treasury yields. In light of these recent events, I feel it is only prudent to perform such an analysis on AGNC's dividend for the third quarter of 2013.

A previous article I wrote laid the general groundwork for this third quarter of 2013 dividend per share analysis. In that article, I projected/analyzed AGNC's general dividend sustainability following its reported second quarter of 2013 results. This article takes the past analysis a step further by specifically analyzing AGNC's third quarter of 2013 dividend per share possibilities. A general overview of AGNC and its two main REIT provisions regarding its dividend distribution requirements were provided in the past article. As such, a discussion of these topics will be omitted from this article. The following is a link to my general dividend sustainability article:

American Capital Agency's Dividend Sustainability Analysis (Post Q2 2013 Earnings)

I would suggest readers to refer back to this past article to better understand the analysis that will be performed in this article. Specifically, the following two IRS REIT provisions mentioned in the previous article are important to understand and comprehend: 1) distribution of 90% of an entity's annual REIT taxable income and 2) an entity's "paid-in-arrears" spillback allowance.

At the end of this article, there will be a conclusion about the current range of AGNC's third quarter of 2013 dividend per share possibilities. This will be followed by my personal opinion of what AGNC's third quarter of 2013 dividend per share amount will be.

Third Quarter of 2013 Dividend Range Scenarios - Overview:

Three dividend range scenarios will be discussed during the rest of the article. Each scenario contains slight variations to certain events/internal management judgments that could happen. All information is based on the assumptions provided within Table 1 below. The following scenarios portray either the probable or minimal amounts that AGNC needs to distribute in order to satisfy its 90% of estimated REIT taxable income provision required by the IRS. As mentioned earlier, the probability of the minimum or near-minimum amount being distributed in the upcoming quarter has moderately increased. This is due to the rapid "spike" in mortgage interest rates and US Treasury yields causing material MBS price declines. As such, this adversely affects AGNC's asset valuations and potential estimated REIT taxable income through deleveraging and its transition into a greater proportion of 15-year fixed-rate MBS to minimize book value losses. However, investors should be aware the interest payments regarding AGNC's MBS investments are backed by government sponsored entities. This includes both Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC) MBS holdings.

The following three dividend range scenarios will be analyzed and discussed:

1) Best Case Scenario: $1.05 Per Share Quarterly Dividend Declared

2) Worst Case Scenario - $0.75 Per Share Quarterly Dividend Declared

3) "Middle-of-the-Road" Scenario: $0.90 Per Share Quarterly Dividend Declared

Table 1 - AGNC Paid-In-Arrears / Spill-Back Provision Analysis (Regarding the Third Quarter of 2013 Dividend)


(Click to enlarge)

Using Table 1 as a main reference point, we can now show AGNC's three dividend range scenarios regarding its dividend per share amount for the third quarter of 2013.

1) Best Case Scenario: $1.05 Per Share Quarterly Dividend (Probability - Low to Moderate)

Side Note: It should be noted the best case scenario initially assumes AGNC wants to distribute 100% of its annual REIT taxable income (AGNC's 100% distribution goal). This assumption will be discussed later on in the article.

To properly understand how the best case scenario regarding AGNC's dividend is obtained, let us analyze Table 1 on a "step-by-step" basis. Using Table 1 above as a reference, AGNC had an estimated $2.09 billion of gross REIT taxable income for the fiscal year 2012. This amount is highlighted in pink and is next to the red reference "C." This includes all estimated REIT taxable income from the first quarter of 2012 through the fourth quarter of 2012. However, to properly compute AGNC's 100% distribution goal, one must back out all net capital gains (tax basis; not GAAP) from AGNC's gross REIT taxable income figure of $2.09 billion. After performing this calculation, AGNC's estimated net capital gains (per its tax basis) is $261 million for the 2012 tax year. This is shown in Table 1 under the red reference "(C * 12.5%) = L."

AGNC's net capital gains tax figure is not actually known until it finalizes its 2012 tax return, which is due by 9/15/2013. It is due on this date after a six-month extension period is exercised and granted by the IRS each year. The percentage I am estimating for this figure is 12.5% of gross REIT taxable income. This percentage is more towards the higher end of the weighted average range reported by AGNC over the past four years due to higher net capital gains reported during 2012.

This net capital gains figure of $261 million is then subtracted from AGNC's estimated gross REIT taxable income of $2.09 billion (mentioned earlier). After this calculation is performed, AGNC's estimated net REIT taxable income figure of $1.83 billion is achieved. This amount is shown in Table 1 above and highlighted in light brown next to the red reference "(C - L) = M."

Side Note: For now, we will skip the amount highlighted in black next to the red reference "(M * 90%) = N" in Table 1 above. This is in relation to the 90% of estimated REIT taxable income provision required by the IRS. This will be discussed in the worst case scenario later in the article and has no direct bearing on AGNC's best case scenario regarding its quarterly dividend distribution.

As mentioned in my previous dividend sustainability article (see the link provided earlier), under the paid-in-arrears / spill-back provision AGNC has until the September 15th of the following year to declare its estimated net REIT taxable income of the prior year. As such, AGNC has until 9/15/2013 to fully pay out its 2012 estimated annual net REIT taxable income of $1.83 billion. Using this provision as guidance, AGNC's fourth quarter of 2012 dividend is the first quarter since the paid-in-arrears / spill-back provision deadline of September 15th occurred for the prior year's (2011's) payout requirements. Therefore, the fourth quarter of 2012 is the first quarter where AGNC's quarterly dividend distributions are "backed-into" its 2012 estimated net REIT taxable income figure of $1.83 billion.

Now let us see how much dividend distributions have actually been paid out by AGNC from the fourth quarter of 2012 through the second quarter of 2013. Prior to the upcoming quarter's dividend declaration, AGNC has already paid the following dividends: 1) fourth quarter of 2012 dividend of $427 million; 2) first quarter of 2013 dividend of $499 million; and 3) second quarter of 2013 dividend of $420 million. The total dividend distributions for these three quarters are $1.34 billion. This amount is shown in Table 1 and highlighted in blue next to the red reference "O." Therefore, a remaining declaration of $482 million would satisfy AGNC's 100% distribution goal. This amount is shown in Table 1 and highlighted in olive green next to the red reference "(M - O) = P."

AGNC had 396.2 million outstanding common shares as of 6/30/2013. This scenario assumes a slight reduction in AGNC's outstanding common shares by approximately 2 million from share buy-backs during the third quarter of 2013. Therefore, the amount AGNC needs to distribute to meet its 100% distribution goal regarding its 2012 estimated net REIT taxable income would be calculated at $1.22 per share. This figure is shown within Table 1 above under the same row as the highlighted olive green dividend distributions figure of $482 million.

Important Side Note to AGNC's Best Case Scenario Per Share Amount: Table 1 above shows that, under the best case scenario, AGNC would actually like to distribute a third quarter of 2013 dividend of $1.22 per share. Under this specific scenario, AGNC's 100% distribution goal of its 2012 net REIT taxable income amount would ultimately be met. However, the probability of a dividend being near the 100% distribution goal has greatly been reduced from the continued volatility in mortgage interest rates, MBS prices, and US Treasury yields. This was evident by the dividend cut that occurred in the second quarter of 2013. AGNC cut its quarterly dividend from $1.25 per share to $1.05 per share due to the factors mentioned above. As such, I'm projecting the best case scenario would be the "stabilization" of AGNC's $1.05 per share dividend due to the current environment. Therefore, the maintaining of the $1.05 per share dividend (not the $1.22 per share dividend shown in Table 1 above) will be my projected best case scenario distribution for the third quarter of 2013. I keep the $1.22 per share dividend distribution shown within Table 1 above to keep this specific calculation intact when future analysis regarding this topic is performed.

In my opinion, this best case scenario of a quarterly dividend distribution of $1.05 per share has a low to moderate probability (33% chance) of occurring. Support for this probability is shown within Table 2 below. Table 2 is AGNC's cumulative undistributed taxable income ('UTI') account. This account is a running "surplus / (deficit)" account that changes each quarter as AGNC underpays or (overpays) its quarterly dividend. We will now analyze AGNC's cumulative UTI account as if the $1.05 per share quarterly dividend amount is declared for the third quarter of 2013.

Table 2 - AGNC Quarterly Cumulative UTI Coverage Analysis (Best Case Scenario)


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Using Table 2 as a reference, AGNC had a cumulative UTI surplus of $517 million by the end of the third quarter of 2012. This amount is shown in Table 2 above next to the red reference "I" (or "J"). After reporting its fourth quarter of 2012, AGNC increased this cumulative UTI surplus to $749 million. Even though the number of AGNC's outstanding common shares increased as well, the UTI dividend distribution coverage ratio (which is based as each quarter's specific dividend rate) grew from a factor of 1.20 to 1.76 at the end of the fourth quarter of 2012. This ratio is shown in Table 2 above next to the red reference "(J / G) = K." This indicates AGNC was accumulating its cumulative UTI at a rate that outpaced its increase in the number of outstanding common shares. This was a very positive indicator. This was due in part to AGNC cautiously cutting its first quarter of 2012 dividend from $1.40 to $1.25 per share. As such, its total quarterly dividend distributions dropped. Therefore, an increase in quarterly UTI surplus occurred. Some argued this dividend cut was not necessary at the time due to the extremely large increase in cumulative UTI throughout 2012.

However, under the volatile mREIT market dynamics, which started to begin back in the first quarter of 2013, AGNC's cumulative UTI surplus was put to use. From its weak first quarter of 2013 results, AGNC's UTI dividend distribution coverage ratio plummeted from a factor of 1.76 at the end of the fourth quarter of 2012 to only a factor of 0.86 by the end of the first quarter of 2013. This was nearly a 50% reduction to this ratio in just one quarter. It should be noted a material decrease in this ratio was in relation to its first quarter of 2013 equity raise of 57.5 million shares. AGNC's cumulative UTI amount basically remained unchanged in the second quarter of 2013 (decrease of $5 million). However, AGNC's cumulative UTI dividend distribution coverage ratio increased from a factor of 0.86 to 1.01 due to the dividend cut that occurred in the second quarter of 2013 ($1.25 per share to $1.05 per share).

Regarding AGNC's estimated REIT taxable income for the third quarter of 2013, an additional piece of information should be addressed. AGNC's management has "hinted" during its recent earnings call for the second quarter of 2013 that its estimated REIT taxable income for the third quarter of 2013 has been negatively affected due to certain tax recognitions regarding its MBS and derivative portfolio.

"…However, it is important to point out that our taxable income in the third quarter is currently biased MATERIALLY LOWER given some of the actions we took in both the second quarter and third quarters, which will be realized for taxable earnings purposes in Q3..."

I am currently projecting AGNC to report an estimated REIT taxable income figure of $279 million for the third quarter of 2013. The quoted text supports such a drop in AGNC's quarterly estimated REIT taxable income figure. This amount is shown in Table 2 and highlighted in light grey next to the red reference "(A + B) = C."

Side Note: Specific accounting and taxation valuations regarding TBA MBS and forward settling agency securities initially impacted AGNC's second quarter of 2013 results. These same events have continued to impact AGNC's third quarter of 2013 results. These transactions have specific accounting and taxation ramifications, which will cause the material drop in estimated REIT taxable income for the third quarter of 2013. A majority of these specific events are confined to one or two quarters of AGNC's operations and should not be definitively considered regarding future quarters.

If AGNC declares the best case scenario of a quarterly dividend distribution of $1.05 per share, its cumulative UTI surplus would drop to $291 million by the end of the third quarter of 2013. Compared to the prior quarter, this would be a reduction of ($134) million or a drop of (32%) of AGNC's cumulative UTI surplus as of 6/30/2013. AGNC's cumulative UTI dividend distribution coverage ratio would also decrease to a factor of 0.70 as of 9/30/2013 versus a factor of 1.01 as of 6/30/2013. This amount is shown at the bottom of Table 2 next to the red reference "(J / G) = K."

From charting past trends regarding AGNC's cumulative UTI surplus and its cumulative UTI dividend distribution coverage ratio, AGNC is cautious in nature when it comes to this surplus/ratio. AGNC recently "tapped" into its cumulative UTI surplus by $322 million in the first quarter of 2013. I would be somewhat surprised if AGNC once again taps into its cumulative UTI surplus by such a large proportion for the third quarter of 2013. This is why I personally feel this scenario has a low to moderate probability (33% chance) of occurring. I'm not saying this best case scenario "could not" happen. However, I feel it "probably will not" happen.

2) Worst Case Scenario: $0.75 Per Share Quarterly Dividend (Probability - Low to Moderate)

The worst case scenario assumes AGNC has now abandoned its 100% distribution goal of its 2012 net REIT taxable income amount. This scenario further assumes AGNC will only distribute its "minimum" required distribution for the third quarter of 2013. As discussed earlier, to maintain its REIT classification status per the IRS, AGNC must declare a minimum of 90% of its 2012 net REIT taxable income before 9/15/2013 (under the paid-in-arrears / spillback provision).

To best understand how the worst case scenario regarding AGNC's dividend is obtained, let us refer back to Table 1. During our discussion of the best case scenario regarding AGNC's dividend, we came to the conclusion AGNC had an estimated $2.09 billion of gross REIT taxable income for fiscal year 2012. This amount is highlighted in pink and is next to the red reference "C." We also came to the conclusion AGNC's estimated net capital gains (per its tax basis) is $261 million for the 2012 tax year. This is shown in Table 1 under the red reference "(C * 12.5%) = L." We further came to the conclusion AGNC's estimated net REIT taxable income is $1.83 billion. This amount is shown in Table 1 and highlighted in light brown next to the red reference "(C - L) = M." Under the worst case scenario, this analysis needs to be taken a step further.

This specific worst case scenario needs to also calculate an amount that is equal to 90% of AGNC's 2012 net REIT taxable income (90% of $1.83 billion). After performing this additional calculation, $1.64 billion of AGNC's net REIT taxable income needs to be distributed to satisfy the 90% of an entity's annual REIT taxable income provision. This amount is highlighted in black within Table 1 above next to the red reference "(M * 90%) = N." As stated earlier regarding the paid-in-arrears / spillback provision, AGNC has until 9/15/2013 to fully pay out 90% of its 2012 estimated net REIT taxable income of $1.64 billion. Prior to the upcoming quarter's dividend declaration, AGNC has already paid the following dividends: 1) fourth quarter of 2012 dividend of $427 million; 2) first quarter of 2013 dividend of $499 million; and 3) second quarter of 2013 dividend of $420 million. The total dividend distributions for these three quarters are $1.34 billion. This amount is shown in Table 1 above and highlighted in blue next to the red reference "O." Therefore, a remaining dividend of $299 million needs to be declared by AGNC prior to 9/15/2013 thus satisfying the required 90% distribution of an entity's annual REIT taxable income provision per the IRS. This amount is shown in Table 1 and highlighted in burgundy next to the red reference "(N - O) = Q."

AGNC had 396.2 million outstanding common shares as of 6/30/2013. This scenario assumes a slight reduction in AGNC's outstanding common shares by approximately 2 million from share buy-backs during the third quarter of 2013 (same assumption as the best case scenario). Therefore, the amount AGNC needs to distribute to meet its 90% distribution requirement per the IRS regarding its 2012 annual net REIT taxable income would be calculated at $0.75 per share. This figure is shown within Table 1 above under the same row as the highlighted burgundy dividend distribution figure of $299 million.

In my opinion, this worst case scenario of a quarterly dividend distribution of $0.75 per share has a low to moderate probability (33% chance) of occurring. Support for this probability is shown within Table 3 below. Table 3 is AGNC's cumulative UTI account. This account is a running surplus / (deficit) account that changes each quarter as AGNC underpays or (overpays) its quarterly dividend. We will now analyze AGNC's cumulative UTI account as if the $0.75 quarterly dividend amount is declared for the third quarter of 2013.

Table 3 - AGNC Quarterly Cumulative UTI Coverage Analysis (Worst Case Scenario)


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If AGNC declares the worst case scenario dividend of $0.75 per share, its cumulative UTI surplus would drop to $409 million by the end of the third quarter of 2013. Compared to the prior quarter, this would only be a reduction of ($16) million or a drop of (4%) of AGNC's cumulative UTI surplus as of 6/30/2013. However, AGNC's cumulative UTI dividend distribution coverage ratio would materially increase to a factor of 1.38 as of 9/30/2013 versus a factor of 1.01 as of 6/30/2013. This amount is shown at the bottom of Table 3 next to the red reference "(J / G) = K."

From charting past trends regarding AGNC's cumulative UTI surplus and its cumulative UTI dividend distribution coverage ratio, AGNC is cautious in nature when it comes to this surplus/ratio. Even though its cumulative UTI would slightly decrease by ($16) million under this scenario, AGNC's cumulative UTI dividend distribution coverage ratio would materially increase to a factor of 1.38. The material increase in this ratio lends me to believe this specific scenario does not have the highest probability of occurring. This is why I personally feel this scenario has a low to moderate probability (33% chance) of occurring. As was the case with the best case scenario, I'm not saying this scenario "could not" happen. However, I feel it "probably will not" happen.

3) Middle-of-the-Road Scenario: $0.90 Per Share Quarterly Dividend (Probability - Moderate to High)

This middle-of-the-road scenario assumes AGNC now has a distribution goal above the 90% distribution requirement per the IRS regarding its 2012 annual net REIT taxable income but still under its typical 100% distribution goal. This scenario uses figures from Table 1 that were already completely discussed in the two other scenarios above. As such, no specific Table 1 references are necessary when analyzing this middle-of-the-road scenario.

In my opinion, out of the three range scenarios, the middle-of-the-road scenario is most likely to occur. Support for this opinion is shown within Table 4 below. Table 4 is AGNC's cumulative UTI account. This account is a running surplus / (deficit) account that changes each quarter as AGNC underpays or (overpays) its quarterly dividend. We will now analyze AGNC's cumulative UTI account as if the $0.90 quarterly dividend amount is declared for the third quarter of 2013.

Table 4 - AGNC Quarterly Cumulative UTI Coverage Analysis (Middle-of-the-Road Scenario)


(Click to enlarge)

If AGNC declares the middle-of-the-road scenario dividend of $0.90 per share, its cumulative UTI surplus would drop to $350 million by the end of the third quarter of 2013. Compared to the prior quarter, this would be a reduction of ($75) million or a drop of (18%) of AGNC's cumulative UTI surplus as of 6/30/2013. More importantly, AGNC's cumulative UTI dividend distribution coverage ratio would only slightly decrease to a factor of 0.99 as of 9/30/2013 versus a factor of 1.01 as of 6/30/2013. This amount is shown at the bottom of Table 2 next to the red reference "(J / G) = K." This scenario would basically see a slight to moderate decrease in cumulative UTI and no change to AGNC's dividend distribution coverage ratio.

From charting past trends regarding AGNC's cumulative UTI surplus and its cumulative UTI dividend distribution coverage ratio, AGNC is cautious in nature when it comes to this surplus/ratio. Even though cumulative UTI would decrease by ($75) million, AGNC's cumulative UTI dividend distribution coverage ratio would basically be unchanged at a factor of 0.99. This is why I personally feel this scenario has a moderate to high probability (66% chance) of occurring. As such, I feel this scenario has the highest probability of occurring for the third quarter of 2013.

Let us briefly discuss AGNC's sister company American Capital Mortgage Corp. (NASDAQ:MTGE) regarding its third quarter of 2013 dividend range scenarios.

Brief Discussion of MTGE's Third Quarter of 2013 Dividend Range Scenarios:

Table 5 - MTGE Quarterly Cumulative UTI Coverage Analysis


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Using Table 5 as a reference, MTGE had a cumulative UTI surplus of $19 million by the end of the third quarter of 2012. This amount is shown in Table 5 above next to the red reference "G" (or "H"). After reporting its fourth quarter of 2012, MTGE increased this cumulative UTI surplus to $42 million. As such, MTGE's UTI dividend distribution coverage ratio (which is based as each quarter's specific dividend rate) grew from a factor of 0.59 to 1.29 at the end of the fourth quarter of 2012. This ratio is shown in Table 2 above next to the red reference "(H / E) = I." As was the case with AGNC, this indicates MTGE was accumulating its cumulative UTI at a rate that outpaced its increase in the number of outstanding common shares. This was a very positive indicator.

However, under the volatile mREIT market dynamics, which started to begin back in the first quarter of 2013, MTGE's cumulative UTI surplus was put to use. From its weak first quarter of 2013 results, MTGE's UTI dividend distribution coverage ratio plummeted from a factor of 1.29 at the end of the fourth quarter of 2012 to only a factor of 0.50 by the end of the first quarter of 2013. This was a 61% reduction to this ratio in just one quarter. It should be noted a material decrease in this ratio was in relation to its first quarter of 2013 equity raise of 23 million shares. MTGE's cumulative UTI amount basically remained unchanged in the second quarter of 2013 (decrease of $1 million). However, MTGE's cumulative UTI dividend distribution coverage ratio slightly increased from a factor of 0.50 to 0.58 due to the dividend cut that occurred in the second quarter of 2013 ($0.90 per share to $0.80 per share).

As of 6/30/2013, MTGE currently does not have a material TBA MBS and forward settling agency security balance. As such, a material decrease in its estimated REIT taxable income for the third quarter of 2013 will not result (as is the case in AGNC's case). However, when compared to AGNC's dividend distribution coverage ratio of 1.01 as of 6/30/2013, MTGE only has a dividend distribution coverage ratio of 0.58 as of 6/30/2013. Therefore, I believe MTGE not having a TBA MBS and forward settling agency security balance but having a much lower dividend distribution coverage ratio as of 6/30/2013 balances itself out to a large extent. This is the main reason why I conclude MTGE will also have a dividend cut in the third quarter of 2013.

Personal Third Quarter of 2013 Dividend Range Estimate for MTGE: $0.65 per share - $0.80 per share

Personal Exact Third Quarter of 2013 Dividend Estimate for MTGE: $0.70 per share

A third quarter of 2013 dividend of $0.70 per share helps mitigate further use of MTGE's cumulative UTI while increasing its dividend distribution coverage ratio.

Conclusions Drawn:

This article attempts to project (through the three dividend range scenarios above) how much of a dividend AGNC will declare regarding the third quarter of 2013 (on a per share basis). All three scenarios discussed take into consideration the amount of estimated net REIT taxable income that needs to be distributed in the third quarter of 2013. It also assumes how much cumulative UTI surplus AGNC had at the end of the second quarter of 2013 and how much would remain after the third quarter of 2013 dividend is declared and distributed.

Through the analysis of these three dividend scenarios, I believe a dividend cut is necessary in the current quarter ensuring a relatively healthy cumulative UTI surplus balance remains in place after the third quarter of 2013. Regarding the possibility of an AGNC dividend cut for the third quarter of 2013, I would say this is currently a moderate to high probability (66% chance) of occurring.

This dividend cut probability is at a moderate to high level due to the continued volatility in mortgage interest rates, MBS prices, and US Treasury yields. As such, mortgage interest rates have increased 50+ basis points during the past four weeks. As such, this adversely affects AGNC's asset valuations and potential estimated REIT taxable income through deleveraging and its transition into a greater proportion of 15-year fixed-rate MBS to minimize book value losses.

The following are this article's best and worst case dividend range scenarios (based on AGNC's 100% distribution goal or the 90% distribution requirement per the IRS regarding its 2012 annual net REIT taxable income):

1) Best Case Scenario = $1.05 Per Share Quarterly Dividend
2) Worst Case Scenario = $0.75 Per Share Quarterly Dividend

I personally feel both the best and worst case scenarios have a low to moderate probability (33% chance) of occurring. Through the analysis performed and discussed above, I believe the following middle-of-the-road scenario has a higher probability (66% chance) of occurring:

Personal Third Quarter of 2013 Dividend Range Estimate for AGNC: $0.85 per share - $0.90 per share

Personal Exact Third Quarter of 2013 Dividend Estimate for AGNC: $0.90 per share

Finally, it should be noted I do not expect this newly reduced dividend rate to be declared for more than several quarters. Once AGNC "re-rolls" its MBS portfolio into higher-yielding coupons, AGNC's assets should stabilize in value while eventually generating a higher net spread income as LIBOR remains suppressed (steepening of the yield curve). This will eventually cause a rise to AGNC's dividend per share rate in future quarters to come. I would currently predict a rise to AGNC's dividend starting in the third quarter of 2014. This is a rough/general estimate regarding a dividend raise and is subject to change as future events unfold.

Full Disclosure on "Long" Position of AGNC: I have owned AGNC since early 2011. I have gradually increased my position in AGNC when certain pullbacks have occurred. I have also sold minor positions in AGNC when I felt the stock was highly overpriced (late 2012). I have taken both cash and reinvested dividends depending on the stock price of AGNC when the quarterly dividends were distributed. I have also held put options on AGNC prior to the recent material sell-off. As such, recent unrealized losses have been mitigated to an extent.

I am "long" AGNC for the longer-term prospects of this specific company. This means I may just "hold" my position during this volatile interest rate environment. It also means I may purchase additional shares when I feel the company is materially undervalued from a stock price versus book value perspective. Even though I would not necessarily advise starting any initial positions within AGNC during this volatile interest rate environment, I would not explicitly sell any positions as well. Most of the negative catalysts for the mREIT sector have partially been priced into the stock prices already. This is just my personal view of the current situation.

I believe there is a good chance AGNC will continue to report several future quarters that are "disappointing" if interest rates continue to sharply rise/existing MBS prices were to quickly decline further. However, I believe this situation will not occur. I feel the market has currently "over-panicked" thus causing mortgage interest rates and US Treasury yields to rise faster than they should have. This environment has caused MBS prices to be negatively impacted. In the coming months, I feel a "leveling-off" of rates will occur and MBS prices will stabilize on most coupon rates. Even if mortgage interest rates and US Treasury yields gradually rise, this is not the worst possible outcome for the mREIT sector. The main issue is the "SPEED" of the rate/yield moves. Whenever there are "spikes" in interest rates, this usually spells trouble for the fixed-rate mREIT sector (variable/hybrid mREITs can have differing results).

As such, I am long AGNC in regards to its longer-term fundamentals and prospects. This would entail a 1-3 year time horizon. This may not be the most profitable strategy to pursue. However, regarding this specific investment, it's a strategy I feel comfortable with. Again, this may not be the best strategy for some "short-term" investors under this recent volatile environment.

Source: American Capital Agency's Dividend Range Scenarios For Q3 2013