Junk Dividends Vs. Quality Earnings: Mortgage REITs Vs. AT&T, Verizon

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Includes: AGNC, NLY, T, VZ
by: Tim Plaehn

I recently published an article concerning the popularity of different stocks on Seeking Alpha as measured by the number of email subscribers, titled "The Seeking Alpha Interest Index: What's Hot, What's Not?" An interesting fact is the high level of interest in high-yield stocks. Near the very top of the list, the number of Seeking Alpha subscribers following AT&T (T) is basically equal to those signed up to follow Annaly Capital (NLY). Not much further down, Verizon Communications (VZ) is half a dozen spots ahead of American Capital Agency (AGNC), with both in the top 20.

There are stark contrasts in the dividend rates and payout histories between the two telco/wireless companies and the two mortgage REIT companies. I thought it would be interesting to compare the returns earned by investors over a recent period of years. The comparison gets a little tricky, given that American Capital Agency went public in May 2008 and the stock moved up sharply over the next year as the company ramped up the quarterly dividend from 31 cents to $1.50. For this comparison, we will look at two sets of data: five-year returns for AT&T, Verizon, and Annaly and two-and-a-half-year returns for all four stocks. The time frame counts backward from April 10, 2012.

Methodology

I used a simple formula to determine total return to shareholders. The ending price minus the starting price for a capital gain or loss is added to the total dividends earned minus taxes. A 15% tax rate was used for AT&T and Verizon dividends, and a 28% tax rate was used for the non-qualified dividends from Annaly and American Capital Agency. Here's how the returns for each stock turned out.

AT&T: The company is a Dividend Aristocrat, but the rising dividend did not cover the 20%-plus share price decline over the last five years. Investors are down 5.9% over the five-year time frame. The two-and-a-half years since October 2009 have been better. The share price is up and AT&T investors earned a total return of 33% after taxes on the dividends.

Verizon: Verizon's share price is up slightly over five years and up sharply over two-and-a-half years. Along with the rising dividend, Verizon investors are up a total 27.2% for the five-year period and 50.25% in the last two-and-a-half years.

Annaly Capital: The April 10, 2012, closing share price for Annaly was a single penny lower than the same date five years earlier. Shareholders earned $11.10 per share in dividends over the five years, working out to $7.99 after tax for a nice 50% five-year gain. Over the shorter two-and-a-half-year time frame, the falling share price has reduced Annaly's total return to 17%.

American Capital Agency: This mortgage REIT has been good to shareholders throughout its short history. A couple dollars of share price appreciation plus big dividends put shareholders up 43.7% over the two-and-a-half years since October 2009, even after paying taxes.

Thoughts On The Results

Just looking at the numbers without context, I am a little surprised at the negative long-term results from AT&T. It seems the market is more comfortable with this stock at a close to 6% yield. On the other side, Verizon has done well for investors, both in the recent past and through the 2008-2009 bear market.

Annaly Capital -- with its inconsistent but obviously declining dividend -- has not done well, comparatively, over the last couple of years. A 14% yield is not much good if the actual dividend keeps going down. The American Capital Agency share value held up much better as the company maintained a stable dividend over the last three years, not including the 2012 first-quarter reduction. The tax bracket has a big effect on the non-qualified REIT dividends. Holding Annaly in a tax-advantaged account produces a 70% return over five years. If someone is in the 35% federal tax bracket and is paying 5% state tax, the total return drops to 40%.

It will be interesting to see how these returns change over the course of 2012. The big question is the sustainability of the current mortgage REIT dividend rates.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.