After a rather bumpy start to the year, mortgage REITs and other high-yield income vehicles have started to gain traction again in February. Today, mortgage REITs and Business Development Companies can again be found at the top of income investors' shopping lists.
My personal favorites in the mortgage REIT sector are Annaly Capital Management, Inc. (NYSE:NLY) and Chimera Investment Corp. (NYSE:CIM), even though I am recommending investors take some profits in Chimera because of the strong run the shares have had in 2016. It can never hurt to take some profits after a surge in price, and to re-enter into a long position at a lower price point when shares are no longer overbought.
But what about American Capital Agency Corp. (NASDAQ:AGNC)?
This mortgage REIT has also seen its share price recover in 2016.
American Capital Agency's shares have risen ~12.9 percent year to date, but have advanced a whopping ~24.8 percent since reaching a new low on January 20, 2016 ($15.69).
The biggest event for American Capital Agency this year was that the mortgage REIT adjusted its dividend payout by 10 percent from $0.20/share to $0.18/share in July.
Read also: 'American Capital Agency: And Here Is The Dividend Cut'.
Frankly, I have not been a fan of American Capital Agency lately, and the reason for that was that the mortgage REIT's accounting book value has slumped over too long a time in my opinion.
American Capital Agency's accounting book value cratered from $25.74/share at the end of 2014 to $22.09/share at the end of the March quarter, reflecting a total decline of ~14.2 percent. Only in the 2nd quarter did American Capital Agency's accounting book value recover a little, advancing ~0.6 percent compared to the 1st quarter.
Source: American Capital Agency
Read also: 'American Capital Agency: Stay Away'.
Limited Total Return Potential
American Capital Agency's shares have dealt surprisingly well with the mortgage REIT's dividend cut announced two months ago, suggesting that income investors are more comfortable with American Capital Agency's dividend rate and coverage moving forward.
But should you buy American Capital Agency at this point?
ONLY if you are comfortable with a high risk mortgage REIT that could sooner or later announce yet another dividend cut.
Another thing to consider before buying AGNC is that American Capital Agency's shares have already had a very good run in 2016, too, which limits the mortgage REIT's total return potential in my opinion.
Consider The Preferred Shares Instead
American Capital Agency's 8.00% Series A Cumulative Redeemable Preferred Stock (AGNCP) is an interesting alternative to the mortgage REIT's common stock.
I have discussed the advantages and disadvantages that come with an investment in the preferred layer of the capital structure in my piece entitled "American Capital Agency: The Preferreds Are Now Yielding 7.6% - Have A Look."
American Capital Agency's preferred shares are a lower risk alternative to the common shares, and still come with a high, effective dividend yield of 7.63 percent.
I continue to prefer Annaly Capital Management and Chimera Investment Corp. over American Capital Agency at this point, though I wouldn't want to buy Chimera at today's market prices.
Taking into account the rate of price appreciation for AGNC this year, even though the mortgage REIT slashed its dividend by 10 percent, the common shares are not an appealing long-term total return play in my opinion. As a matter of fact, I like American Capital Agency's preferred shares with an effective dividend yield of 7.63 percent, and much lower downside much better. Buy for income and portfolio protection.
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Disclosure: I am/we are long NLY, CIM.
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.