Anworth Mortgage (ANH) is a seasoned mREIT that invests in mortgage paper of various kinds. The common stock is trading near its 52 week lows (not uncommon in the space) but in this article, we'll be taking a look at a different way to invest in ANH and that is through its Series A Cumulative Preferred Stock (ANH-A, may differ depending on your broker). In this article, we'll take a look at this unconventional way to gain exposure to ANH and see if it is a good fit for your portfolio.
ANH-A is actually a very straightforward instrument and as such, an explanation of what it is will be brief. ANH-A is a traditional preferred stock which means it is not backed by any kind of debt issue and also has no stated maturity date. In other words, unless ANH decides to call this issue it will persist as long as ANH is around to pay the dividends. And speaking of calling the issue, since 2009 ANH has had the option to redeem ANH-A and has thus far thought better of it. As a result, ANH-A persists and you can own a piece of ANH's Series A preferred if you wish.
At the issue price of $25 the annualized dividends of $2.15625 imply a coupon rate of 8.625%. However, shares are actually trading a bit lower than the issue price at present, $24.25 as of this writing, and as such, the current yield on ANH-A is higher at 8.9%. This is strong to say the least and according to my research, is in the top echelon of preferred yields at present. For what it's worth, distributions from ANH-A are made quarterly so while monthly distributions are certainly nice, no such luck here. And the dividends on ANH-A are cumulative meaning that even if ANH manages to miss payments, it is obligated to make them up to holders of ANH-A. Thus, your dividend payments are safe barring a bankruptcy event.
As we all know there are significant risks associated with owning preferred stock. Chief among them is interest rate risk and ANH-A is a special animal with regard to that. Any kind of income security like a preferred stock is going to be sensitive to interest rate swings because income securities are priced relative to the yields of benchmark instruments, such as Treasuries. When Treasury yields move up so do income securities (in general) and that means a loss of principal. By owning ANH-A you will be subject to paper gains and losses as interest rates move but rest assured that you will only be forced to sell if ANH calls ANH-A and pays you the full $25. Otherwise, stick it out and you'll likely be rewarded with higher prices after the inevitable spikes in interest rates pass.
Interest rate risk is magnified with ANH-A because the issuer, ANH, depends on interest rate spreads to produce income and if the market views that spread relationship to be at risk, ANH-A will likely suffer as a result. The point is that you need to perform your own due diligence and make sure you can stomach the risk of owning ANH-A; despite its terrific yield, it simply isn't for everyone.
ANH-A does represent a great opportunity for more enterprising income investors to take a step out on the risk curve and go for a higher yield. While investing in mortgage paper buyers like ANH isn't for everyone the preferred offering of ANH is decidedly less risky than the common. If you can take the volatility that could potentially arise you have a chance now to get a nearly 9% current yield on a preferred stock you can own for a very long time. And with shares trading at a small discount to the call price, even if ANH decides to redeem ANH-A, you'll be made whole and then some.
Additional disclosure: I may initiate a long position in ANH-A at any time.