American Capital Agency Corp (AGNC) is an mREIT with a lot of potential. It boasts a dividend yield of 19.57 percent and trades at a P/E ratio of 4.07, which is a much better value than any other top mREITs. For example, Annaly Capital Management (NLY) has a dividend yield of 14.61 percent and Capstead Mortgage Corporation (CMO) has a dividend yield of 15.04 percent.
A big reason behind American Capital Agency Corp’s higher yield is the financial instability of its fund manager, American Capital. American Capital barely avoided bankruptcy in 2008 and completed a debt restructuring in 2010. As a publicly traded private equity firm, it trades at a P/E ratio of about 2.
Investing in AGNC compared to other mREITs is a risky decision. On one side, you are earning a higher dividend yield, but if American Capital fails, you have to wonder if another mREIT will pick up the assets and at what kind of a discount. Also, it is difficult to determine if the underlying assets of American Capital Agency Corp are similar to those of other mREITs and if they are managed properly.
I am a fan of REITs in the current market because interest rates are likely to stay low for a long time and REITs are historically not affected much by fluctuations in market prices. I believe that American Capital Agency Corp is very risky right now, but for investors who are trying to achieve high returns, it is a good investment. For a 19.57 percent yield, it provides a larger dividend yield than anything else that you will find on the market. It is just important to be knowledgeable regarding what would happen if American Capital fails, because a trust is only as strong as its managers. As we saw with the flash crash a few weeks ago, these trusts can drop steeply in value if their short term debt cannot be renewed.
Investing in a higher yield mREIT means you trust the asset manager's ability to renew the trust's debt and structure a strong mortgage security portfolio.