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Summary

  • Mortgage REITs suffered in 2013 when the 10 year treasury bond interest rate rose abruptly.
  • AGNC cut its dividend twice in 2013, due to its Mortgage Backed Securities portfolio's loss of value.
  • AGNC announced excellent results for the first quarter of 2014 and grew book value.

Last April 2013, the 10 year treasury bond interest rate rose from 1.61% yield to over 2% at the mention of tapering bond purchases by the chairman of the Federal Reserve. By the end of the year, this yield had risen to 3%. In reaction to this move, REIT investments, including mortgage REITs, fell in price precipitously. As their book values dropped in sympathy with the value of their portfolio of mortgage backed securities, mREITs such as American Capital Agency (NASDAQ:AGNC) fell in price and cut their dividends.

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It can be seen from the above chart that there was a 46% drop in price in the aftermath of the taper talk. In the first four months of 2014, AGNC is up 18%. Note that the price moves opposite the 10 year treasury interest rate. To me, this indicates that AGNC is a leveraged long-term bond fund, which cycles opposite the 10 year treasury yield. It makes its income by buying long-term federal agency securities from Fannie Mae (OTCQB:OTCQB:OTCQB:FNMA), Freddie Mac (OTCQB:OTCQB:OTCQB:FMCC) and others using short-term borrowed funds. Being a highly leveraged security, it is not for the faint of heart, but in this yield starved world, some high yield securities with these characteristics are necessary in this retiree's portfolio. I try to maintain mREITs at less than 15% of my total portfolio value.

With the summer coming in a politically charged year globally, I decided to run a 5 year dividend growth study (with dividends reinvested ) for AGNC to see if it was a good stock to buy and hold with such a volatile past year.

StockDate of reinvestDiv Rate# SharesDividendDrip price# Shares purTotal ValueCurrent Yield
Totals 1,060.28$17,010.12 625.28
03/27/14$0.651,028.82$668.7421.2631.46$22,541.5412.23%
12/27/13$0.65995.15$646.85$19.2133.67$19,763.7213.53%
09/26/13$0.80961.56$769.25$22.9033.59$22,788.9813.97%
06/26/13$1.05918.52$964.45$22.4143.04$21,548.5718.74%
03/18/13$1.25883.97$1,104.96$31.9834.55$29,374.3915.63%
12/24/12$1.25848.52$1,060.65$29.9235.45$26,448.4416.71%
09/19/12$1.25819.13$1,023.92$34.8429.39$29,562.5214.35%
06/19/12$1.25788.79$985.98$32.4930.35$26,613.6415.39%
03/05/12$1.25757.51$946.89$30.2831.27$23,884.4416.51%
AGNC12/20/11$1.40721.50$1,010.11$28.0536.01$21,248.2919.96%
09/21/11$1.40686.09$960.52$27.1235.42$19,567.1820.65%
06/21/11$1.40653.96$915.55$28.5032.12$19,553.4619.65%
03/21/11$1.40623.94$873.52$29.1030.02$19,030.2919.24%
12/29/10$1.40594.97$832.96$28.7528.97$17,938.3919.48%
09/24/10$1.40566.82$793.55$28.1928.15$16,772.2519.87%
06/28/10$1.40538.85$754.39$26.9727.97$15,287.1720.76%
03/29/10$1.40511.34$715.87$26.0227.51$14,020.8821.52%
12/29/09$1.40486.21$680.69$27.0925.13$13,852.1420.67%
09/30/09$1.40463.41$648.77$28.4522.80$13,832.6919.68%
06/30/09$1.50435.00$652.50$22.9728.41$10,644.4526.12%

From the spreadsheet, it can be seen that an initial investment of $10,000 in June 2009 grew to $22,541 over the 5 year period, for an average total return of 17.65% per year. It should also be noted that the yield fell steadily from 26% to 12% as the dividends were cut. It also should be noted that the price today is close to the initial price of $22.97. Being a cyclical stock, one must buy it near the bottom to hold through the complete cycle. There are many who bail out when the yield reaches 20%, just before the dividend cut. However, I buy and hold this stock for the high current income. I believe the interest rate cycle has stabilized and the up cycle is starting for the dividend. An important caveat for strong returns on this interest rate spread play is a near zero short-term interest rate as set by the Fed.

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The above graph shows the cyclical nature of this stock.

I first invested in AGNC back in 2012 after finding out about it on Seeking Alpha. I was quite pleased with the growth of the portfolio with dividends reinvested. However, I found that the positions grew too large with respect to the total portfolio, so I began to invest the dividends in other stocks. This procedure has provided diversification, especially among high-yield stocks.

The current P/E ratio is 6.93 ttm , with an 11.9% current yield. On April 28, 2014, American Capital Agency reported $1.18 comprehensive income per common share and $24.49 net book value per common share. This produced a 5.1% economic return for the quarter, or 20.5% annualized.

Conclusion: From the above analysis and earnings report, I conclude that AGNC is a good buy up to the book value of $24.49 per share. I will continue to purchase AGNC for my portfolio and those of my grandchildren.

As I have already mentioned, this stock is not for the faint of heart. If one desires to own it, they should go over the reports and be sure they understand what they are buying.

Source: Is American Capital Agency A Good mREIT For The Buy And Hold Retiree?