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Mortgage REITs have done well in 2012. In particular American Capital Agency (NASDAQ:AGNC) and American Capital Mortgage (NASDAQ:MTGE) have appreciated 24.07% and 31.4% in price so far this year, not counting the dividends paid, (AGNC $2.50; MTGE $1.80). The current yields on these two stocks are: AGNC 14.35% and MTGE 14.56%. Being mREITs, the risk associated with these stocks is higher than lower dividend paying stocks. However, I like to think of them as leveraged bond funds and note that there is a tremendous demand for bonds in the present market. Due the the Federal Reserve's push to get more of the mortgage market into non-agency instruments, I have switched my new dividend investment monies into MTGE in this sector, however the sector still only amounts to 9.43% of total portfolio while MTGE is 53.16% of that and AGNC is 46.84%. A good explanation of what this small cap mREIT is all about is explained in the article, One year of American Capital Mortgage Investment Corp.

Traditionally, I have used Vanguard Brokerage Service's drip plan for dividend reinvestment of all dividend paying stocks. However, when I purchased MTGE, I found that this option did not exist for it. I have implemented my own version of a drip plan by taking all dividends in the mREIT sector in cash and investing a fixed amount on the ex-dividend date in the better performing security, in this case MTGE. I call this plan a Dividend Investment Plan (DIP). The $2 fee charged for each individual purchase has not impaired the dividend investment and picking the ex-dividend date has improved the prices that I paid for the stock versus the pay date-- when artificial demand from automatic dividend reinvestment plans has run the price up. A spreadsheet showing this plan with an initial investment of $10,000 and a fixed investment of $500 per quarter is shown below:

StockDate of reinvestDiv Rate# SharesFixed InvestDip price# Shares purTotal ValueCurrent Yield
Totals 690.86$2,000.00 100.86
06/19/12$0.90669.34$500.00$23.2421.51$16,05615.49%
03/13/12$0.90647.09$500.00$22.4722.25$15,04016.02%
MTGE12/20/11$0.80619.48$500.00$18.1127.61$11,71917.67%
DIP09/21/11$0.20590.00$500.00$16.9629.48$10,5064.72%
Date of reinvestDiv Rate# SharesDividendDrip price# Shares purTotal ValueCurrent Yield
673.40$1,740.03 83.40
Comparison06/19/12$0.90648.29$583.46$23.2425.11$15,65015.49%
MTGE03/13/12$0.90623.33$561.00$22.4724.97$14,56716.02%
DRIP12/20/11$0.80596.96$477.57$18.1126.37$11,28817.67%
09/21/11$0.20590$118.00$16.966.96$10,1244.72%

It can be seen from the table that the fixed investment provided slightly more shares than the drip plan in the first year of the stock's existence. However, it can also be seen that the dividend in the drip plan has exceeded the fixed investment in the last two quarters and should catch up in the next year, due to compound growth at the high yield rate. In fact with the drip plan, the $10k investment has grown to $15,649.82 in the course of a year for a total return of 56.49% vs. the fixed investment total of $16,055.51. Note, I am only trying to simulate the drip plan return, not maximize the investment growth. These values have been charted below:

(click to enlarge)

From the chart, it can be seen that the yield has tapered off somewhat this year, although with a growing book value and a growing housing market, it may pick back up as the year progresses. I feel secure with the current $.90 per quarter dividend, even if it is not increased this year. Mortgage REITs are risky investments with high yield to compensate for the risk. I have ventured into this sector slowly over the course of the past year and have limited my investment to 10% of portfolio and individual stocks to 15% of portfolio. If the market sells off after the election, as I believe it will, I feel that AGNC and MTGE will continue to show the strong resilience that they have demonstrated over the past 4 years and 1 year .

(click to enlarge)

Conclusion: In order for retirees, like myself to maintain cash flow during these hard times, some exposure to high yield bond-like instruments is necessary. In addition these investments stabilize the portfolio through normal market volatility. It is important to note that a small cap mortgage REIT, like MTGE is more risky than a larger one like AGNC. For those that need consistency of dividends, other sectors provide much smoother returns. I went into mREITS to maintain a 4% yield on my current portfolio and with all the turbulence in the global markets, they have proven their worth to me. These two articles explain my investments: 16% Yield in Retirement: American Capital Agency Corp and Is American Capital Mortgage's 16% Yield a Substitute for Agency mREITS? As this year has progressed, my appetite for increased risk in the mREIT sector has also increased. I am currently toying with the idea of a sector allocation of 20% long term for REIT investments, seeing them to be more resilient in the current ZIRP market, especially with the 30-year treasury bond down to 2.68% yield today.

Retirees especially, should be concerned with their investments in volatile global markets that we find ourselves in today. Make no investment until you have thoroughly investigated the stock or instrument that you are buying.

Source: Invest In Homes With American Capital Mortgage Investment Corp.