16% Yield In Retirement: American Capital Agency Corp.

Mar.12.12 | About: AGNC Investment (AGNC)

The market has had its first correction in 2012 and it was a bit disquieting. Many stocks fell, but one that has held up and continues to pay high yield is American Capital Agency Corp. (NASDAQ:AGNC). This Mortgage REIT is similar to a leveraged bond fund, in the fact that it purchases government agency securities (Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, Government National Mortgage Association etc.) and makes its return on the spread between short term interest rates and these longer term securities. These returns are leveraged 7.9:1 (as of the end of 2011).

There are several issues that the MREITs face, such as pre-payments of mortgages, HARP 2.0, and even their status as a REIT. One should read the Form 10-K to fully understand the ramifications of all of this. However, after reading it, I believe that American Capital Agency Corporation meets my needs as a high yield, MREIT for my retirement portfolio.

AGNC started business on May 20, 2008. I watched it for over a year and purchased it for myself and my grandchildren in the fall of 2011. Although, the dividend was cut from $1.40 per quarter to the current $1.25 per quarter, the price of the stock has appreciated. They have recently announced a secondary offering of shares and the price has dropped somewhat, which I see as a buying opportunity. (Data from AGNC Form 10-K and Yahoo Finance)

A 5-year price chart is shown below:

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As can be seen from the chart, AGNC had a rugged start dead in the middle of the Great Recession and then rose to it's current level of around $30 and has been very consistent since that time. The next chart shows AGNC when compared to (NYSEARCA:SPY) for the same 5-year period:

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It can be seen from this chart that AGNC held up better than SPY during the Great Recession and grew rapidly after the bottom in March 2009.

We now look at the dividend income stream provided by a $10k investment in AGNC for the period June 2008- March 2012. It should be noted that I hold this stock in an IRA to defer the effects of normal income tax rate to which REITs are subject.


Quarterly Dividend Rate

Number of Shares

Quarterly Income





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In order to investigate the growth of the dividend reinvestment in this stock, I will create a 4-year spreadsheet (June 2008-March 2012).

Stock Date of reinvest Div Rate # Shares Dividend Drip price # Shares pur Total Value Current Yield
Totals 1,300.54 $18,288.04 699.58
AGNC 03/05/12 $1.25 1,248.98 $1,561.23 $30.28 51.56 $39,380.36 16.51%
12/20/11 $1.40 1,189.61 $1,665.45 $28.05 59.37 $35,033.90 19.96%
09/21/11 $1.40 1,131.21 $1,583.69 $27.12 58.40 $32,262.12 20.65%
06/21/11 $1.40 1,078.24 $1,509.54 $28.50 52.97 $32,239.50 19.65%
03/21/11 $1.40 1,028.75 $1,440.25 $29.10 49.49 $31,376.90 19.24%
12/29/10 $1.40 980.98 $1,373.37 $28.75 47.77 $29,576.59 19.48%
09/24/10 $1.40 934.57 $1,308.40 $28.19 46.41 $27,653.86 19.87%
06/28/10 $1.40 888.45 $1,243.83 $26.97 46.12 $25,205.30 20.76%
03/29/10 $1.40 843.09 $1,180.32 $26.02 45.36 $23,117.44 21.52%
12/29/09 $1.40 801.66 $1,122.32 $27.09 41.43 $22,839.22 20.67%
09/30/09 $1.40 764.06 $1,069.68 $28.45 37.60 $22,807.16 19.68%
06/30/09 $1.50 717.22 $1,075.83 $22.97 46.84 $17,550.43 26.12%
03/31/09 $0.85 683.28 $580.79 $17.11 33.94 $12,271.67 19.87%
12/29/08 $1.20 645.74 $774.88 $20.64 37.54 $14,102.86 23.26%
09/25/08 $1.00 612.16 $612.16 $18.23 33.58 $11,771.76 21.94%
06/30/08 $0.31 600.96 $186.30 $16.64 11.20 $10,186.27 7.45%
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It can be seen from the dividend column that the quarterly dividend rose by a factor of 8 during this 4 year period. Notice, also that the current yield rose from 7.45% to 16.51% over that time. The number of shares purchased by the reinvestment also rose steadily, due to growing capital and high steady dividend rate. The company's capital appreciation came about through increased company size and new secondary share offerings. Portfolio gains had the additional advantage of reinvested dividends. The ending value was $39,380.36 for a gain of 393.8%. This annualized value was 40.8% per year.

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Notice the rapid rise in current yield in the first years of operation, coupled with the steady share value. After second quarter of 2009, the share price showed a steady increase, while the current yield remained fairly constant. This same situation may be occurring in (NASDAQ:MTGE), the new sister company of AGNC. Note both companies are managed by the same organization, American Capital.

Conclusion: In these times of low interest rates on fixed income instruments, retirees like myself, need income to meet our daily expenses. I try to maintain an average yield on my portfolio of 4%. Many stocks have not kept up with dividend increases -- like CenturyLink (NYSE:CTL) -- and I find myself short of income. By adding AGNC to my portfolio, I once again neared the 4% yield point on the total portfolio. There is much global financial tension, including the European debt crisis and the downgrade of the U.S. credit rating. I feel that AGNC will weather the storm. However, I limit my allocation to this sector to 2% at present. I am thinking about raising that to 4%, due to other dividend cuts that I have suffered this year, namely Frontier Communications Corp. (NYSE:FTR). It is critical that each investor does their own due diligence before making any investment.

Disclosure: I am long AGNC, CTL, FTR.

Additional disclosure: I may establish a position in MTGE in the next 72 hours.