This 7.5% Yielding Mortgage REIT Preferred Stock Is Still Worth Buying

| About: AGNC Investment (AGNC)

Summary

Preferred shares have unique return and risk features.

Mortgage REIT valuations have risen significantly in 2016, reducing the reward-to-risk ratio for income investors.

I discuss a 7.5% yielding preferred stock that I think is an attractive alternative to the mortgage REIT's common shares.

My favorite mortgage Real Estate Investment Trusts this year were Annaly Capital Management, Inc. (NYSE:NLY), and Chimera Investment Corporation (NYSE:CIM). Both mortgage REITs were extreme high yielders that came with dividend yields well north of 10% at the start of the year. And both mortgage REITs have really not disappointed in the first nine months of 2016.

Annaly Capital Management's shares have risen 24.54 percent this year, and shares have started to edge closer to $11 lately. Though I have said that I am going to take a hard look at Annaly Capital Management again only if shares fall below $10, the mortgage REIT is clearly one of the best in class, and has a big following, too.

Chimera Investment Corporation also has not disappointed, and has staged a major comeback this year.

Chimera Investment Corp.'s share price has advanced a whopping 36.78 percent, making the mortgage REIT a great success for income investors (at least for those investors that bought earlier this year). Investors that bought around the January low ($9.43) are looking at an even bigger capital gain of around ~77 percent...not bad for a high yield income vehicle that came with a 16 percent dividend yield at the time.

Read also: Chimera's 16% Dividend Yield Is Not A Red Flag.

While I preferred Annaly Capital Management and Chimera Investment Corporation as high yield mortgage REIT plays, I also explicitly stayed away from American Capital Agency Corp. (NASDAQ:AGNC), largely because a slumping accounting book value, and a 10 percent dividend cut weighed on the mortgage REIT's shares.

Since I disliked the risk came with an investment in American Capital Agency's common shares, I took a look at the mortgage REIT's preferred shares instead. Most mortgage REITs have issued preferred shares which have a couple of advantages and disadvantages compared to the common shares.

Advantages include that preferred shares pay a dividend that is less at risk of getting cut than common share dividends, and preferred shares usually are much less volatile than common shares, too.

Disadvantages include that preferred shares don't offer any compelling dividend and capital upside whereas the common shares, theoretically, offer both.

Knowing about the advantages and disadvantages of preferred shares is important for income investors that may not yet be too familiar with the unique risk and return features of an investment in the preferred stock layer of a mortgage REIT.

Therefore, an alternative to American Capital Agency's common shares is American Capital Agency's 8.00% Series A Cumulative Redeemable Preferred Shares (AGNCP) IMO. AGNC's Series A preferred stock pays shareholders a quarterly dividend of $0.50/share, or $2.00/share annually. Since American Capital Agency's preferred shares change hands for $26.60 at the time of writing, an investment in AGNC's Series A preferreds throws off a nice dividend of 7.52 percent.

Read also: Should You Buy This 11% Yielding Mortgage REIT?.

Your Takeaway

Investors don't always have to buy the common shares, especially if there are any concerns with respect to the mortgage REIT's accounting book value, or valuation. Mortgage REITs have had a good run in 2016, including shares of American Capital Agency, but the reward-to-risk ratio has flipped...mortgage REITs are no longer the great deals they were at the beginning of the year. An alternative, however, is AGNC's preferred stock. Preferred shares, including American Capital Agency's Series A preferred shares, offer a bunch of advantages such as limited downside, and a steady flow of income that is less risky than the flow of common share dividends. Buy for income.

If you like to read more of my articles, and like to be kept up to date with the companies I cover, I kindly ask you that you scroll to the top of this page and click follow. I am largely investing in dividend paying stocks, but also venture out occasionally and cover special situations that offer appealing reward-to-risk ratios and have potential for significant capital appreciation. Above all, my immediate investment goal is to achieve financial independence.

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.