American Capital Agency: The Preferreds Are Now Yielding 7.6% - Have A Look

| About: AGNC Investment (AGNC)


Preferred shares are attractive income vehicles, with specific risk-and-return characteristics.

AGNC's 8.00% Series A Cumulative Redeemable Preferred Stock is an interesting alternative to the common stock.

I discuss the advantages/disadvantages of investing in AGNC's preferred shares.

AGNCP yields 7.59 percent at the time of writing.

I am not a big fan of mortgage real estate investment trust American Capital Agency Corp. (NASDAQ:AGNC), to be honest, and that's largely because the company's accounting book value has declined rather dramatically over the last five quarters. Five quarters ago, at the end of 2014, American Capital Agency's accounting book value hit $25.74/share. Today, that accounting book value sits 14 percent lower at $22.09/share. As a result, I have voiced my concerns over the mortgage REIT, and recommended investors to buy Annaly Capital Management, Inc. (NYSE:NLY) instead.

I do prefer Annaly Capital Management over American Capital Agency, but that opinion refers to the common shares, I should clarify. American Capital Agency's preferred shares are a different ballgame, and are surely interesting for dividend investors trying to dial down investment risk.

Preferred shares, as opposed to common shares, rank higher in the capital structure, which makes them, theoretically, safer income investments. Preferred shares have seniority over common shares, meaning that in a bankruptcy event preferred shareholders get their money back before common shareholders get theirs.

American Capital Agency's 8% Yielding Series A Preferred Shares Are Looking Solid

American Capital Agency's 8.00% Series A Cumulative Redeemable Preferred Shares (AGNCP) look like a good buy at this point IMO. The mortgage REIT's preferred shares are selling for $26.37 at the time of writing, reflecting a ~5.5 percent premium to their liquidation preference value. The Series A preferred shares throw off a quarterly dividend of $0.50/share (annual dividend income $2.00/share), which means they are selling for a 7.59 percent yield at the time of writing.

There are a couple of things worth mentioning when it comes to comparing American Capital Agency's common and preferred shares:

1. American Capital Agency's Series A preferred shares pay a quarterly dividend, whereas the mortgage REIT's common shares pay a monthly dividend.

2. The Series A preferred shares come with a yield disadvantage of 504 basis points: The preferred shares yield 7.59 percent, whereas American Capital Agency's common shares sell for a 12.63 percent dividend yield.

3. The lower yield of American Capital Agency's Series A preferred shares has a trade-off, though: They are much less volatile than the common shares.

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Your Takeaway

All considered, American Capital Agency's Series A preferred shares are looking quite interesting at this point. Preferred shares come with certain risk-and-return characteristics that are very different from those of common shares: Their seniority in the capital structure, and lower volatility, are positives, but investors are made to accept a lower total investment yield as a result.

American Capital Agency's preferred shares yield less than the common shares at the time of writing, and I don't expect this to change at all; the yield difference is, in fact, 504 basis point. That being said, though, a near 8 percent dividend yield from a preferred stock is nothing to scoff at. Buy for income.

Disclosure: I am/we are long NLY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.