Thanks to mortgage rates remaining at historical lows, mortgage REITs continue to reap the benefits while at the same time rewarding their investors with high dividend yields and growth of share price. In this article, I will discuss why American Capital Agency (AGNC) will continue providing its double-digit dividend at least through 2014.
Analyzing the Fundamentals
With its monthly dividend of $0.10 per share, American Capital has been paying out a dividend yield in excess of 17%. Although the company's second-quarter 2012 financials were not as exhilarating as they were in 2011, or even in the first quarter of 2012, it is expected that this REIT industry leader will continue rewarding dividend-seeking investors with a yield between 10% and 14% in both the short and long run.
While using a great deal of leverage tends to increase the risk for investing in REITs, American Capital has reduced this risk in some areas by investing most of its assets in guaranteed U.S. government agency securities. Of late, American Capital has been providing investors with one-year returns of over 23%, and three-year annualized returns of approximately 30%. In addition, the company's shares seem to be reasonably priced, with a book value of just under $29.50 per share.
Where Other REITs Stand in Comparison
Due to a recent decline in mortgage applications -- primarily due to a slight hiccup in interest rates -- many REITs have seen a slight lowering of share price. And, in a recent slew of downgraded ratings by FBR Capital Markets, even REIT industry leader Annaly Capital Management (NLY) was not immune. The downgrade was due in large part to the potentially increased exposure to higher prepayments, based on the size of Annaly's overall portfolio.
Yet, it does seem that this REIT may be well prepared in just about any type of interest rate situation, as the firm is known for its conservative management approach. With a current dividend yield at approximately 13%, Annaly has had three-year annualized returns in the neighborhood of 18%, so it is likely to continue rewarding investors on both the share growth and dividend income sides.
Similarly, Armour Residential REIT (ARR) has also been producing a dividend yield of over 17%, although this is down somewhat, closer to 16%. Similar to other REITs, Armour's interest income and portfolio value are sensitive to interest rates. However, this REIT has a more conservative approach to managing this type of risk, making it a bit more averse. In addition to investing in instruments that are less interest rate sensitive such as hybrid and adjustable rate securities, Armour also strives to hedge approximately 40% of the company's fixed-rate mortgage securities. The firm also uses derivatives for the purpose of shortening the duration of the interest sensitive fixed rate securities.
For the second quarter of 2012, Armour reported interest income, net of amortization of premium, of over $86 million, up from just over $29 million in the prior year -- which is up nearly 200%. With this in mind, I feel that Armour could be another good choice for those who are seeking both growth and income in the REIT sector.
CYS Investments (CYS) is another REIT that has been riding high on the dividend front. It's $0.50 per share dividend provides a yield of over 14%. The firm had a solid second-quarter 2012, with core earnings of just under $45 million and, as of the end of that quarter, a net asset value per share of over $13.50. CYS brought in a net income in excess of $100 million during that time, equating to a net interest income per share of $0.49165.
In mid-July, this REIT completed the underwriting of a public offering of 46 million additional common shares. These had a price $13.70 per share, equating to a raising of more than $620 million that will likely be used for investment of Agency RMBS, as well as for additional investment into interest rate swaps and caps. The company currently has a leverage ratio of 7.6-to-1, with a liquidity position of over $1 billion.
While many REITs have pulled back somewhat, overall performance in this industry has been in some cases, stellar. But for one, the news has not been so great. Chimera Investments (CIM) is one that has suffered. Even though the company has been rewarding investors with a dividend yield in excess of 20%, that has fallen somewhat to just under $18, and the estimates for future earnings per share are also not so great. In fact, earlier estimates stand at $0.45, which is down from the 2012 estimate of $0.47.
The Bottom Line
Even though American Capital's second-quarter 2012 numbers were off a bit from the company's highs of 2011 and early 2012 -- even leading some analysts to downgrade the shares from outperform to neutral -- I still feel that this company can produce positive results for investors.
While its 10%-14% dividend yields are not as exciting as its recent 17% yield, the company would still be providing investors with a solid yield -- one that can beat most other investments, especially in comparison to current CD and bank interest rates. Given this, I believe that investors who are seeking a high-quality, high-yielding REIT should still keep American Capital at the top of their lists. This is especially the case if investors can pick up shares of American Capital for under $30.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.