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Summary

  • AGNC, along with the company’s agency mREIT peers, had material dividend decreases from 2011 through the fourth quarter of 2013.
  • The severity of the dividend decreases throughout 2013 had a high correlation to each company’s recent past yield percentages.
  • CMO had the least amount of dividend reductions over the past several years because the company’s past yield percentages continued to be the lowest out of the agency mREIT sector.
  • By the fourth quarter of 2013, each agency mREIT company's yield percentages were materially lower versus the first quarter of 2013 (with the exception of CMO).
  • I feel we saw a bottom, regarding dividend per share amounts, during the fourth quarter of 2013. Dividends should remain stable or slightly increase in the upcoming quarters.

Author's Note: PART 1 of this article examined American Capital Agency Corp. (NASDAQ:AGNC) and five other agency mREIT peers in regards to recent book value ('BV') per share changes and a current premium (discount) to BV analysis. PART 2 is a continuation of this analysis, but will now compare dividend per share changes and a recent past yield analysis. PART 1 helps lead to a better understanding of the topics and analysis that will be discussed in PART 2. The link to PART 1's analysis is provided below:

PART 1 - American Capital Agency's Recent Book Value And Dividend Compared To Its Agency mREIT Peers

This two-part article is a very detailed look at AGNC's BV and dividend per share changes and compares these changes to the company's agency mREIT peers. For readers who just want the summarized conclusions/results, I would suggest to scroll down to the "Conclusions Drawn" section at the bottom of each part of the article.

Focus of Article:

The focus of this article is to examine the recent dividend per share changes of American Capital Agency Corp. and compare the company's results to most of its agency mortgage real estate investment trust (mREIT) peers. This analysis will show recent past data with supporting documentation (via Tables 3 and 4). Table 3 will compare dividend per share figures from AGNC and five other agency mREIT peers for 2013. Table 3 will also show each company's stock price as of 9/10/2013 and compare the following dividend metrics: 1) trailing 12-month dividend yield; 2) annual forward yield to stock price; and 3) annual forward yield to BV. Table 4 will compare dividend per share figures from AGNC and five other agency mREIT peers for the first quarter of year 2014. Table 4 will also show each company's stock price as of 12/20/2013 and 3/28/2014 and compare the same dividend metrics listed within Table 3's description above.

By highlighting and analyzing each company's historical dividend per share rates and yield percentages, one will better understand why certain agency mREIT companies continued to aggressively reduce dividends while others were able to maintain per share amounts during 2013.

At the end of this article, there will be a conclusion on which agency mREIT companies had the lowest and highest dividend per share decreases during the past several years (percentage wise). There will also be a conclusion on the current situation regarding the entire agency mREIT sector's future dividend sustainability.

Agency mREIT Dividend Per Share Change Analysis (Including Recent Past Yield Analysis) - Overview:

Let us start this analysis by first getting accustomed to the information provided in Tables 3 and 4 below. This will be beneficial when explaining how AGNC matches up to the company's agency mREIT peers regarding quarterly dividend per share changes and the recent past yield analysis.

Table 3 - Agency mREIT Dividend Per Share Changes for 2013 (Including Recent Past Yield Analysis)

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Table 4 - Agency mREIT Dividend Per Share Changes for the First Quarter of 2014 (Including Recent Past Yield Analysis)

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(Source: Tables were created entirely by myself, including all calculated yields, by obtaining historical stock prices from NASDAQ and each company's dividend per share figures from the SEC's EDGAR Database)

Using Table 3 above as a reference, AGNC and five other agency mREIT peers are presented in alphabetical order according to each company's stock ticker symbol. Table 3 states the following information on the six agency mREIT companies (see each corresponding column): 1) dividend per share amount for the first quarter of 2013; 2) dividend per share amount for the second quarter of 2013; 3) stock price as of 9/10/2013; 4) trailing 12-month dividend yield (dividend per share amount for the third quarter of 2012 through the second quarter of 2013); 5) annual forward dividend yield (based on the dividend per share amount for the second quarter of 2013 using the stock price as of 9/10/2013); 6) annual forward dividend yield (based on the dividend per share amount for the second quarter of 2013 and BV as of 6/30/2013); 7) dividend per share amount for the third quarter of 2013; 8) dividend per share amount for the fourth quarter of 2013; and 9) economic return for the fourth quarter of 2013 (dividend per share amount plus (minus) the BV per share change for the fourth quarter of 2013) (percentage amount). Table 4 above has columns fairly similar to Table 3. The only notable differences between the two tables are the dates used and yield percentages shown. As such, a description of each column within Table 4 is deemed unwarranted.

Now that a brief overview of Table 3 above has been established, this article will now proceed to highlight the recent dividend per share changes between AGNC and the company's agency mREIT peers. Within this discussion, a recent past yield analysis will also be presented.

Side Note: Capstead Mortgage Corp. (NYSE:CMO) and Hatteras Financial Corp. (NYSE:HTS) are currently classified as variable-rate agency mREIT companies. AGNC, ARMOUR Residential REIT Inc. (NYSE:ARR), CYS Investments Inc. (NYSE:CYS), and Annaly Capital Management Inc. (NYSE:NLY) are classified as fixed-rate agency mREIT companies. Readers should be aware as such when the analysis is presented below. Also, the agency mREIT average yield and economic return percentages discussed below include the following agency mREIT companies that will not be discussed within this article: 1) Anworth Mortgage Asset Corp. (NYSE:ANH); and 2) Orchid Island Capital (NYSEMKT:ORC). Due to the extremely low market capitalizations of these two agency mREIT companies (below $1 billion), an analysis of ANH and ORC has been excluded from this article.

1) American Capital Agency Corp.:

The first agency mREIT to discuss is AGNC. Using Table 3 above as a reference, AGNC had declared a dividend of $1.25 and $1.05 per share for the first and second quarters of 2013, respectively. This calculated to a dividend increase (decrease) of ($0.20) per share or a (16%) quarterly reduction. While most of AGNC's agency mREIT peers began to materially decrease dividend per share amounts sometime during 2012, AGNC only performed one modest reduction during the first quarter of 2012. As a direct result of this modest decrease, AGNC actually had a growing cumulative undistributed taxable income ('UTI') balance throughout 2012. However, as fixed mortgage rates/U.S. Treasury yields began to reverse course and started rising during the first quarter of 2013, AGNC needed to perform several material dividend cuts during 2013 due to being on the "wrong side" of the TBA MBS net long (short) position and overall costs associated with a higher hedging coverage ratio (amongst other factors).

Still using Table 3 as a reference, AGNC's stock price traded at $23.14 per share on 9/10/2013. This date was prior to most agency mREIT companies declaring a dividend per share amount for the third quarter of 2013. As such, all yield calculations below are based on AGNC's dividend per share amount for the second quarter of 2013. When calculated, this was a trailing 12-month dividend yield of 20.74%, an annual forward yield to AGNC's stock price as of 9/10/2013 of 18.15%, and an annual forward yield to AGNC's BV as of 6/30/2013 of 16.46%. When comparing each yield percentage to AGNC's agency mREIT peers, all three percentages were above the agency mREIT average. As stated in a previous article, the conclusion at the time was AGNC needed to continue to decrease the company's dividend per share amount due to the lowering yields seen throughout the mREIT sector due to rising interest rates and also to be more "in-line" with the company's agency mREIT peers.

AGNC had declared a dividend of $0.80 per share for the third quarter of 2013. This calculated to a dividend increase (decrease) of ($0.25) per share or a (24%) quarterly reduction. AGNC had declared a dividend of $0.65 per share for the fourth quarter of 2013. This calculated to a dividend increase (decrease) of ($0.15) per share or a (19%) quarterly reduction. As stated above, these were necessary material dividend reductions. AGNC had an economic return of (2.88%) for the fourth quarter of 2013. This was slightly worse than the average economic return for the agency mREIT sector of (0.86%).

Now using Table 4 above as a reference, AGNC's stock price traded at $19.87 per share on 12/20/2013. This date was after all the agency mREIT companies declared a dividend per share amount for the fourth quarter of 2013. As such, all yield calculations below are based on AGNC's dividend per share amount for the fourth quarter of 2013. When calculated, this was a trailing 12-month dividend yield of 18.87%, an annual forward yield to AGNC's stock price as of 12/20/2013 of 13.09%, and an annual forward yield to AGNC's BV as of 9/30/2013 of 10.29%. When comparing each yield percentage to AGNC's agency mREIT peers, the trailing 12-month dividend yield was still above average. However, more importantly, AGNC's annual forward yield based on the company's 12/20/2013 stock price and BV as of 9/30/2013 were now basically in line with the agency mREIT average. AGNC's trailing 12-month dividend yield, annual forward yield to the company's stock price, and annual forward yield to its BV had increased (decreased) (1.87%), (5.07%), and (6.18%), respectively. Since AGNC's yield percentages were more in line with the company's agency mREIT peers, it was concluded in a previous article the dividend would stabilize in the first quarter of 2014.

As anticipated, AGNC had declared a stable dividend of $0.65 per share for the first quarter of 2014. Due to the fact AGNC aggressively reduced the company's dividend from $1.25 per share during the first quarter of 2013 to $0.65 per share by the fourth quarter of 2013, the company's yield percentages materially decreased and became in line with its agency mREIT peers.

Still using Table 4 as a reference, AGNC's stock price traded at $21.25 per share on 3/28/2014. This date was after all the agency mREIT companies declared a dividend per share amount for the first quarter of 2014. As such, all yield calculations below are based on AGNC's dividend per share amount for the first quarter of 2014. When calculated, this was a trailing 12-month dividend yield of 14.82%, an annual forward yield to AGNC's stock price as of 3/28/2014 of 12.24%, and an annual forward yield to AGNC's BV as of 12/31/2013 of 10.87%. When comparing each yield percentage to AGNC's agency mREIT peers, all three percentages were now in line with the agency mREIT average. AGNC's trailing 12-month dividend yield, annual forward yield to the company's stock price, and annual forward yield to its BV had increased (decreased) (4.05%), (0.85%), and 0.58%, respectively.

Since AGNC's yield percentages were more in line with the company's agency mREIT peers, I conclude AGNC's dividend should continue to be stable going into the second quarter of 2014. Let us perform this same analysis on the five other agency mREIT peers and see how each company compared to AGNC regarding dividend per share changes and recent past yield percentages.

2) ARMOUR Residential REIT Inc.:

Using Table 3 above as a reference, ARR had declared a dividend of $0.24 and $0.21 per share for the first and second quarters of 2013, respectively. This calculated to a dividend increase (decrease) of ($0.03) per share or a (13%) quarterly reduction. ARR began to reduce dividends back in the fourth quarter of 2011 when the company declared a dividend of $0.33 per share. During the third quarter of 2011, ARR declared a dividend of $0.36 per share.

Still using Table 3 as a reference, ARR's stock price traded at $4.23 per share on 9/10/2013. This date was prior to most agency mREIT companies declaring a dividend per share amount for the third quarter of 2013. As such, all yield calculations below are based on ARR's dividend per share amount for the second quarter of 2013. When calculated, this was a trailing 12-month dividend yield of 24.11%, an annual forward yield to ARR's stock price as of 9/10/2013 of 19.86%, and an annual forward yield to ARR's BV as of 6/30/2013 of 15.47%. When comparing each yield percentage to ARR's agency mREIT peers, all three percentages were above the agency mREIT average (as was the case with AGNC). The conclusion at the time was ARR needed to continue to decrease the company's dividend per share amount due to the lowering yields seen throughout the mREIT sector due to rising interest rates and also to be more in line with the company's agency mREIT peers.

ARR had declared a stable dividend of $0.21 per share for the third quarter of 2013. However, as was evidenced in the yield percentages above, ARR needed to continue to decrease the company's dividend per share amount. A stable dividend in the third quarter of 2013 just put more pressure on the dividend going forward. We saw this come to fruition when ARR had declared a dividend of only $0.15 per share for the fourth quarter of 2013. This calculated to a dividend increase (decrease) of ($0.06) per share or a (29%) quarterly reduction. As stated above, this was a necessary material dividend reduction. ARR had an economic return of (7.58%) for the fourth quarter of 2013. This was the worst economic return out of the agency mREIT sector.

Now using Table 4 above as a reference, ARR's stock price traded at $3.74 per share on 12/20/2013. This date was after all the agency mREIT companies declared a dividend per share amount for the fourth quarter of 2013. As such, all yield calculations below are based on ARR's dividend per share amount for the fourth quarter of 2013. When calculated, this was a trailing 12-month dividend yield of 21.66%, an annual forward yield to ARR's stock price as of 12/20/2013 of 16.04%, and an annual forward yield to ARR's BV as of 9/30/2013 of 11.41%. When comparing each yield percentage to ARR's agency mREIT peers, all three yield percentages were still above average (however the degree above average lowered). However, ARR's annual forward yield based on the company's BV as of 9/30/2013, was now more in line with the agency mREIT average. ARR's trailing 12-month dividend yield, annual forward yield to the company's stock price, and annual forward yield to its BV had increased (decreased) (2.46%), (3.82%), and (4.06%), respectively. Since ARR's yield percentages were more in line with the company's agency mREIT peers, the probability of its dividend stabilizing in the first quarter of 2014 had increased.

ARR had declared a stable dividend of $0.15 per share for the first quarter of 2014 (including declaring stable dividends of $0.15 per share for the second, third, and fourth quarters of 2014). Due to the fact ARR aggressively reduced the dividend from $0.24 per share during the first quarter of 2013 to $0.15 per share by the fourth quarter of 2013, the company's yield percentages materially decreased and became only slightly above its agency mREIT peers.

Still using Table 4 as a reference, ARR's stock price traded at $4.13 per share on 3/28/2014. This date was after all the agency mREIT companies declared a dividend per share amount for the first quarter of 2014. As such, all yield calculations below are based on ARR's dividend per share amount for the first quarter of 2014. When calculated, this was a trailing 12-month dividend yield of 17.43%, an annual forward yield to ARR's stock price as of 3/28/2014 of 14.53%, and an annual forward yield to ARR's BV as of 12/31/2013 of 12.63%. When comparing each yield percentage to ARR's agency mREIT peers, all three percentages continued to be slightly above the agency mREIT average. ARR's trailing 12-month dividend yield, annual forward yield to the company's stock price, and annual forward yield to its BV had increased (decreased) (4.22%), (1.51%), and 1.22%, respectively.

Since ARR's yield percentages were slightly above the company's agency mREIT peers, I conclude its dividend would have a slightly greater probability of further reduction going into the second quarter of 2014. However, as stated earlier, ARR had already declared dividends through the fourth quarter of 2014. As such, when compared to ARR's agency mREIT peers, the likelihood of a possible dividend reduction in the first quarter of 2015 will inherently be higher for this company. I am not saying ARR will have a reduced dividend in the first quarter of 2015. However, when compared to the five other agency mREIT companies within this analysis, ARR's probability of a dividend reduction in the first quarter of 2015 would be the greatest (even if it is a relatively low probability).

3) Capstead Mortgage Corp.:

Using Table 3 above as a reference, CMO had declared a dividend of $0.31 per share for both the first and second quarters of 2013. CMO began to reduce dividends back in the third quarter of 2011 when the company declared a dividend of $0.44 per share. During the second quarter of 2011, CMO declared a dividend of $0.48 per share.

Still using Table 3 as a reference, CMO's stock price traded at $11.75 per share on 9/10/2013. This date was prior to most agency mREIT companies declaring a dividend per share amount for the third quarter of 2013. As such, all yield calculations below are based on CMO's dividend per share amount for the second quarter of 2013. When calculated, this was a trailing 12-month dividend yield of only 10.89%, an annual forward yield to CMO's stock price as of 9/10/2013 of only 10.55%, and an annual forward yield to CMO's BV as of 6/30/2013 of only 9.69%. When comparing each yield percentage to CMO's agency mREIT peers, all three percentages were well below the agency mREIT average (even the company's closest agency mREIT peer HTS). Due to the extremely low dividend yield percentages, the conclusion at the time was CMO had a much higher probability of being able to sustain the company's dividend at $0.31 per share (including the fact the company basically held 100% variable-rate MBS).

As anticipated, CMO had declared a stable dividend of $0.31 per share for the third and fourth quarters of 2013. As stated above, a dividend decrease was a fairly low probability due to CMO's materially lower average yields. CMO had an economic return of 3.45% for the fourth quarter of 2013. This was the best economic return out of the agency mREIT sector (slightly beating out HTS).

Now using Table 4 above as a reference, CMO's stock price traded at $12.46 per share on 12/20/2013. This date was after all the agency mREIT companies declared a dividend per share amount for the fourth quarter of 2013. As such, all yield calculations below are based on CMO's dividend per share amount for the fourth quarter of 2013. When calculated, this was a trailing 12-month dividend yield of 9.95%, an annual forward yield to CMO's stock price as of 12/20/2013 of 9.55%, and an annual forward yield to CMO's BV as of 9/30/2013 of 10.04%. When comparing each yield percentage to CMO's agency mREIT peers, the company's trailing 12-month dividend yield and annual forward yield based on the company's 12/20/2013 stock price continued to be below the agency mREIT average. However, CMO's annual forward yield based on the company's 9/30/2013 BV was now in line with the agency mREIT average. CMO's trailing 12-month dividend yield, annual forward yield to the company's stock price, and annual forward yield to its BV had increased (decreased) (0.94%), (0.60%), and 0.35%, respectively. Since CMO's yield percentages continued to be either below or in line with the company's agency mREIT peers, the probability of its dividend remaining stable in the first quarter of 2014 remained fairly high.

CMO had declared a slight dividend increase to $0.34 per share for the first quarter of 2014. This calculated to a dividend increase (decrease) of $0.03 per share or a 10% quarterly rise. Again, since CMO basically had the lowest yield percentages out of the agency mREIT sector, this modest dividend increase was not too surprising.

Still using Table 4 as a reference, CMO's stock price traded at $12.99 per share on 3/28/2014. This date was after all the agency mREIT companies declared a dividend per share amount for the first quarter of 2014. As such, all yield calculations below are based on CMO's dividend per share amount for the first quarter of 2014. When calculated, this was a trailing 12-month dividend yield of 9.78%, an annual forward yield to CMO's stock price as of 3/28/2014 of 10.47%, and an annual forward yield to CMO's BV as of 12/31/2013 of 10.91%. When comparing each yield percentage to CMO's agency mREIT peers, the trailing 12-month dividend yield and the annual forward yield based on the company's 3/28/2014 stock price continued to be slightly below average. CMO's annual forward yield based on the company's BV as of 12/31/2013 continued to be basically in line with the agency mREIT average. CMO's trailing 12-month dividend yield, annual forward yield to the company's stock price, and annual forward yield to its BV had increased (decreased) (0.18%), 0.52%, and 0.87%, respectively.

Since CMO's yield percentages were either slightly below or in line with the company's agency mREIT peers, I conclude there's a high probability that its dividend should continue to be stable going into the second quarter of 2014. It appears CMO continues to be the "safest" choice within the agency mREIT sector. However, as stated in PART 1 of this analysis, the market seems to have already "priced-in" CMO's "safest choice" designation via the modest premium to CURRENT BV.

4) CYS Investments Inc.:

Using Table 3 above as a reference, CYS had declared a dividend of $0.32 and $0.34 per share for the first and second quarters of 2013, respectively. This calculated to a dividend increase (decrease) of $0.02 per share or a 6% quarterly rise. CYS began to reduce dividends back in the third quarter of 2011 when the company declared a dividend of $0.55 per share. During the second quarter of 2011, CYS declared a dividend of $0.60 per share. It should also be noted CYS was the only company out of the agency mREIT sector to declare a "special" dividend of $0.52 per share during the fourth quarter of 2012. As such, the dividend reductions that occurred in 2011 and 2012 should be deemed "less severe" due to this one-time payout.

Still using Table 3 as a reference, CYS' stock price traded at $7.75 per share on 9/10/2013. This date was prior to most agency mREIT companies declaring a dividend per share amount for the third quarter of 2013. As such, all yield calculations below are based on CYS' dividend per share amount for the second quarter of 2013. When calculated, this was a trailing 12-month dividend yield of 19.48%, an annual forward yield to CYS' stock price as of 9/10/2013 of 17.55%, and an annual forward yield to CYS' BV as of 6/30/2013 of 13.33%. When comparing each yield percentage to CYS' agency mREIT peers, the trailing 12-month dividend yield and the annual forward yield based on the company's 9/10/2013 stock price were above average. However, CYS' annual forward yield based on the company's BV as of 9/30/2013 was basically in line with the agency mREIT average. As such, the conclusion at the time was CYS had a higher probability to reduce the company's dividend versus CMO. However, when compared to both ARR and AGNC, CYS had a lower probability to reduce the company's dividend in future quarters.

CYS had declared a stable dividend of $0.34 per share for the third quarter of 2013. However, as was evidenced in the yield percentages above, CYS possibly needed to slightly reduce the company's dividend. A stable dividend in the third quarter of 2013 just put more pressure on the dividend going forward. We saw this come to fruition when CYS had declared a dividend of $0.32 per share for the fourth quarter of 2013. This calculated to a dividend increase (decrease) of ($0.02) per share or a (6%) quarterly reduction. CYS had an economic return of (5.84%) for the fourth quarter of 2013. This was the second worst economic return out of the agency mREIT sector (as stated above, ARR had the worst).

Now using Table 4 above as a reference, CYS' stock price traded at $7.47 per share on 12/20/2013. This date was after all the agency mREIT companies declared a dividend per share amount for the fourth quarter of 2013. As such, all yield calculations below are based on CYS' dividend per share amount for the fourth quarter of 2013. When calculated, this was a trailing 12-month dividend yield of 17.67%, an annual forward yield to CYS' stock price as of 12/20/2013 of 17.14%, and an annual forward yield to CYS' BV as of 9/30/2013 of 12.67%. When comparing each yield percentage to CYS' agency mREIT peers, all three percentages were above the agency mREIT average. CYS' trailing 12-month dividend yield, annual forward yield to the company's stock price, and annual forward yield to its BV had increased (decreased) (1.81%), (0.41%), and (0.66%), respectively. Since CYS' yield percentages were higher than the company's agency mREIT peers, the probability of its dividend remaining stable in the first quarter of 2014 was the lowest out of the six companies. However, the probability of a dividend reduction in the first quarter of 2014 was still only modest.

CYS had declared a stable dividend of $0.32 per share for the first quarter of 2014. Still using Table 4 as a reference, CYS' stock price traded at $8.24 per share on 3/28/2014. This date was after all the agency mREIT companies declared a dividend per share amount for the first quarter of 2014. As such, all yield calculations below are based on CYS' dividend per share amount for the first quarter of 2014. When calculated, this was a trailing 12-month dividend yield of 16.02%, an annual forward yield to CYS' stock price as of 3/28/2014 of 15.53%, and an annual forward yield to CYS' BV as of 12/31/2013 of 13.85%. When comparing each yield percentage to CYS' agency mREIT peers, all three percentages continued to be modestly above the agency mREIT average. CYS' trailing 12-month dividend yield, annual forward yield to the company's stock price, and annual forward yield to its BV had increased (decreased) (1.65%), (1.60%), and 1.18%, respectively.

Since CYS' yield percentages were modestly above the company's agency mREIT peers, I conclude the company's dividend will have the greatest probability of reduction going into the second quarter of 2014. Again, I am not saying CYS will have a reduced dividend in the second quarter of 2014. However, when compared to the five other agency mREIT companies within this analysis, CYS' probability of a dividend reduction would be the greatest (even if it is a relatively low probability).

5) Hatteras Financial Corp.:

Using Table 3 above as a reference, HTS had declared a dividend of $0.70 per share for both the first and second quarters of 2013. HTS began to reduce dividends back in the fourth quarter of 2011 when the company declared a dividend of $0.90 per share. During the third quarter of 2011, HTS declared a dividend of $1.00 per share.

Still using Table 3 as a reference, HTS' stock price traded at $18.21 per share on 9/10/2013. This date was prior to most agency mREIT companies declaring a dividend per share amount for the third quarter of 2013. As such, all yield calculations below are based on HTS' dividend per share amount for the second quarter of 2013. When calculated, this was a trailing 12-month dividend yield of 15.93%, an annual forward yield to HTS' stock price as of 9/10/2013 of 15.38%, and an annual forward yield to HTS' BV as of 6/30/2013 of 12.62%. When comparing each yield percentage to HTS' agency mREIT peers, all three percentages were basically in line with the agency mREIT average. Even though HTS' yield percentages were in line with the company's fixed-rate agency mREIT peers, when compared to CMO (the only other variable-rate agency mREIT peer) its yield percentages were materially higher. Due to this fact (and the underlying nature of variable-rate MBS), the conclusion was HTS had a somewhat lower probability of being able to sustain the company's dividend at $0.70 per share. At the time, I anticipated a minor to modest cut to HTS' dividend in either the third or fourth quarter of 2013.

HTS had declared a dividend of only $0.55 per share for the third quarter of 2013. This calculated to a dividend increase (decrease) of ($0.15) per share or a (21%) quarterly reduction. This was somewhat of a negative surprise in my opinion (larger than expected dividend reduction). HTS' interest rate swaps had a weighted average fixed pay rate of 1.41% as of 6/30/2013. When compared to CMO's weighted average fixed pay rate of only 0.61%, this was an 80 basis point ('bps') difference. This is just one factor (of several) which led to the material dividend reduction in the third quarter of 2013. HTS had declared a dividend of $0.50 per share for the fourth quarter of 2013. This calculated to a dividend increase (decrease) of ($0.05) per share or a (9%) quarterly reduction. However, HTS had a nice "bounce-back" regarding results for the fourth quarter of 2013. HTS had an economic return of 3.21% for the fourth quarter of 2013. This was the second best economic return out of the agency mREIT sector (slightly less than CMO).

Now using Table 4 above as a reference, HTS' stock price traded at $16.78 per share on 12/20/2013. This date was after all the agency mREIT companies declared a dividend per share amount for the fourth quarter of 2013. As such, all yield calculations below are based on HTS' dividend per share amount for the fourth quarter of 2013. When calculated, this was a trailing 12-month dividend yield of 14.60%, an annual forward yield to HTS' stock price as of 12/20/2013 of 11.92%, and an annual forward yield to HTS' BV as of 9/30/2013 of 9.39%. When comparing each yield percentage to HTS' agency mREIT peers, all three percentages were now slightly below the agency mREIT average. Also, HTS' yield percentages were now closer to CMO's yield percentages. HTS' trailing 12-month dividend yield, annual forward yield to the company's stock price, and annual forward yield to its BV had increased (decreased) (1.32%), (3.46%), and (3.24%), respectively. Since HTS' yield percentages were now slightly below the company's agency mREIT peers, the probability of its dividend stabilizing in the first quarter of 2014 was modestly higher.

As anticipated, HTS had declared a stable dividend of $0.50 per share for the first quarter of 2014. Due to the fact HTS aggressively reduced the dividend from $0.70 per share during the first quarter of 2013 to $0.50 per share by the fourth quarter of 2013, the company's yield percentages materially decreased and became more in line with its agency mREIT peers.

Still using Table 4 as a reference, HTS' stock price traded at $18.65 per share on 3/28/2014. This date was after all the agency mREIT companies declared a dividend per share amount for the first quarter of 2014. As such, all yield calculations below are based on HTS' dividend per share amount for the first quarter of 2014. When calculated, this was a trailing 12-month dividend yield of 12.06%, an annual forward yield to HTS' stock price as of 3/28/2014 of 10.72%, and an annual forward yield to HTS' BV as of 12/31/2013 of 9.30%. When comparing each yield percentage to HTS' agency mREIT peers, all three percentages continued to be slightly below the agency mREIT average. Also, HTS' yield percentages were now even closer to CMO's yield percentages. HTS' trailing 12-month dividend yield, annual forward yield to the company's stock price, and annual forward yield to its BV had increased (decreased) (2.54%), (1.20%), and (0.08%), respectively.

Since HTS' yield percentages were slightly below the company's agency mREIT peers, I conclude there's a rather high probability that HTS' dividend should continue to be stable going into the second quarter of 2014.

6) Annaly Capital Management Inc.:

The last agency mREIT to analyze is NLY. Using Table 3 above as a reference, NLY had declared a dividend of $0.45 and $0.40 per share for the first and second quarters of 2013, respectively. This calculated to a dividend increase (decrease) of ($0.05) per share or a (11%) quarterly reduction. NLY began to reduce dividends back in the third quarter of 2011 when the company declared a dividend of $0.60 per share. During the second quarter of 2011, NLY declared a dividend of $0.65 per share.

Still using Table 3 as a reference, NLY's stock price traded at $11.73 per share on 9/10/2013. This date was prior to most agency mREIT companies declaring a dividend per share amount for the third quarter of 2013. As such, all yield calculations below are based on NLY's dividend per share amount for the second quarter of 2013. When calculated, this was a trailing 12-month dividend yield of 15.35%, an annual forward yield to NLY's stock price as of 9/10/2013 of 13.64%, and an annual forward yield to NLY's BV as of 6/30/2013 of 12.28%. When comparing each yield percentage to NLY's agency mREIT peers, all three percentages were slightly to modestly lower than the agency mREIT average. When compared to NLY's closest agency mREIT peer AGNC, the company's yield percentages were materially lower by 4-5%. Due to this fact, the conclusion at the time was NLY would still have several minor to modest dividend reductions. However, when compared to AGNC, these dividend reductions would be modest in comparison.

As anticipated, NLY had declared a dividend of $0.35 per share for the third quarter of 2013. This calculated to a dividend increase (decrease) of ($0.05) per share or a (13%) quarterly reduction. NLY had declared a dividend of $0.30 per share for the fourth quarter of 2013. This calculated to a dividend increase (decrease) of ($0.05) per share or a (14%) quarterly reduction. When compared to NLY's closest agency mREIT peer AGNC, the company's dividend reductions were less severe (percentage wise). NLY had an economic return of (2.23%) for the fourth quarter of 2013. This was slightly worse than the average economic return for the agency mREIT sector of (0.86%) but fractionally better than AGNC.

Now using Table 4 above as a reference, NLY's stock price traded at $10.10 per share on 12/20/2013. This date was after all the agency mREIT companies declared a dividend per share amount for the fourth quarter of 2013. As such, all yield calculations below are based on NLY's dividend per share amount for the fourth quarter of 2013. When calculated, this was a trailing 12-month dividend yield of 14.85%, an annual forward yield to NLY's stock price as of 12/20/2013 of 11.88%, and an annual forward yield to NLY's BV as of 9/30/2013 of 9.45%. When comparing each yield percentage to NLY's agency mREIT peers, all three percentages were slightly lower than the agency mREIT average. When compared to NLY's closest agency mREIT peer AGNC, the company's yield percentages were slightly to modestly lower. NLY's trailing 12-month dividend yield, annual forward yield to the company's stock price, and annual forward yield to its BV had increased (decreased) (0.49%), (1.76%), and (2.83%), respectively. Since NLY's yield percentages were slightly lower than the company's agency mREIT peers, the probability of the company's dividend stabilizing in the first quarter of 2014 was fairly high.

As anticipated, NLY had declared a stable dividend of $0.30 per share for the first quarter of 2014. Due to the fact NLY continued to reduce the dividend from $0.45 per share during the first quarter of 2013 to $0.30 per share by the fourth quarter of 2013, the company's yield percentages modestly decreased and continued to be slightly below its agency mREIT peers.

Still using Table 4 as a reference, NLY's stock price traded at $10.93 per share on 3/28/2014. This date was after all the agency mREIT companies declared a dividend per share amount for the first quarter of 2014. As such, all yield calculations below are based on NLY's dividend per share amount for the first quarter of 2014. When calculated, this was a trailing 12-month dividend yield of 12.35%, an annual forward yield to NLY's stock price as of 3/28/2014 of 10.98%, and an annual forward yield to NLY's BV as of 12/31/2013 of 9.89%. When comparing each yield percentage to NLY's agency mREIT peers, all three percentages continued to be slightly below the agency mREIT average. When compared to NLY's closest agency mREIT peer AGNC, the company's yield percentages continued to be slightly to modestly lower. NLY's trailing 12-month dividend yield, annual forward yield to the company's stock price, and annual forward yield to its BV had increased (decreased) (2.50%), (0.90%), and 0.44%, respectively.

Since NLY's yield percentages continued to be slightly below the company's agency mREIT peers, I conclude there's a relatively high probability that NLY's dividend should continue to be stable going into the second quarter of 2014.

Conclusions Drawn (PART 2):

This article has examined AGNC and five other agency mREIT peers in regards to dividend per share changes and a recent past yield analysis. Partially using Tables 3 and 4 as supporting evidence, the following were the combined dividend per share changes (percentage wise) for the variable-rate agency mREIT companies from the second quarter of 2011 through the fourth quarter of 2013 (in order of least to most severe decreases):

CMO: (29.17%) decrease in dividend per share amount

HTS: (50.00%) decrease in dividend per share amount

The following were the combined dividend per share changes (percentage wise) for the fixed-rate agency mREIT companies from the second quarter of 2011 through the fourth quarter of 2013 (in order of least to most severe decreases):

CYS: (46.67%) decrease in dividend per share amount

AGNC: (53.57%) decrease in dividend per share amount

NLY: (53.85%) decrease in dividend per share amount

ARR: (58.33%) decrease in dividend per share amount

Therefore, it seems CMO had the lowest combined dividend per share decrease (percentage wise) during the past several years by a modest margin. However, using Tables 3 and 4 as a reference, this was due to the fact CMO historically had extremely low yield percentages when compared to the rest of the sector. As market dynamics changed (including a general net rise in mortgage interest rates/U.S. Treasury yields) mREIT companies that had yields nearing 20% needed to "stem back" these lofty yield percentages. Since CMO's yield percentages were materially lower than the rest of the sector, this company did not need to reduce its dividend as aggressively as the rest of the sector. During the past several years (especially 2013), we have seen the rest of the mREIT sector materially reduce dividend per share amounts thus establishing yield percentages that are more similar to what CMO has maintained for several years now.

Since the five other agency mREIT peers continued to lower yields throughout most of 2012 and 2013, the probability of a dividend per share "bottom" grew. I feel we have seen such a bottom, regarding dividend per share amounts, during the fourth quarter of 2013. As such, I feel dividends should continue to remain relatively stable for the agency mREIT sector and even have a chance for a slight increase in the upcoming quarters. These slight increases will depend on each company's MBS and derivative portfolios and the general movement of mortgage interest rates/U.S. Treasury yields.

Out of the six agency mREIT companies, CYS currently has the highest yield percentages and thus I feel has the lowest probability of an increase in dividends in the upcoming quarters. ARR currently follows behind in a close second.

While I believe CMO continues to be the "safest" mREIT investment regarding both BV and dividend sustainability, the market seems to have already priced-in CMO's safest choice designation via the modest premium to CURRENT BV.

Investors looking for more risk (hence more potential capital appreciation and yield), I would first look to AGNC, HTS, or NLY. If I were concerned about a spike in interest rates over the short term, I would look towards HTS as a possible investment. If I felt interest rates over the short term would remain flat or decrease, I would look towards AGNC and NLY as a possible investment. If one currently holds a position in CMO, I would continue to hold this investment but not add to my position due to the modest premium to CURRENT BV (limited upside potential).

Source: American Capital Agency's Recent Book Value And Dividend Compared To Its Agency mREIT Peers - Part 2