Historically, my dividend investing strategy focused upon a barbell approach. The barbell has high yielding stocks and low yielding dividend growth stocks. Federal Reserve Chairman Bernanke's speech, on September 13th, has forced my hand. I have adjusted my portfolio to reflect Mr. Bernanke's commentary and planned Federal Reserve actions. This portfolio reflects my present mindset on the economy and Mr. Bernanke's statements. I have bought American Capital Mortgage (NASDAQ:MTGE), American Capital Agency (NASDAQ:AGNC), American Capital (NASDAQ:ACAS), Visa (NYSE:V) and Agnico Eagle Mines (NYSE:AEM).
Federal Reserve Action
Mr. Bernanke has stated the Federal Reserve will "… buy $40 billion in mortgage debt every month …" The $40 billion in monthly mortgage backed security (MBS) purchases is open ended in time frame and dollar amount. The quantitative easing programs in the past have focused upon a specific time frame and specific dollar amount. These factors are now open ended. This has inflationary ramifications.
Investment Actions Based upon Fed's September 13 Commentary
The net effect of Mr. Bernanke's capital fusion will ultimately lead to inflation. Mr. Plossner, president and chief executive officer of the Federal Reserve Bank of Philadelphia, has commented on the inflationary impacts. Mr. Plossner stated the Quantitative Easing 3 could be "… highly inflationary ...." when the U.S. dollars circulate into the real economy.
My Portfolio Adjustments
1. American Capital Mortgage
My first action was to add funds to my American Capital Mortgage position. The June 30 book value per share is $22.08. The company was able to maintain their 90 cent dividend for the 3rd quarter. Mr. Gary Kain is the president and chief investment officer. I believe Mr. Kain can increase the American Capital Mortgage non-agency MBS portfolio percentage. Mr. Kain has proven to be a key leader in the mREIT sector. I fully expect his abilities to carry over to the non-agency MBS asset selection.
2. American Capital Agency
Mr. Kain has succeeded in the same role at American Capital Agency. American Capital Agency can own only agency MBS. American Capital Agency yields 13.70%. The agency mortgage real estate investment trust will operate in a sector where the Fed is buying $40 billion worth of MBS per month. This could put pressure on the constant prepayment rate, which would directly impact the overall MBS portfolio's net yield margin.
I continue to hold American Capital Agency shares due to Mr. Kain's focus upon purchasing agency MBS with low constant prepayment rates. I expect American Capital Agency to issue a secondary in the next two days. As the ex-dividend day passes, a secondary will be accretive to current shareholders.
3. American Capital, Ltd.
American Capital is a deep value position based upon its relationship with American Capital Mortgage and American Capital Agency. As mentioned in this August 2 article, "American Capital's 40% Discount To Net Asset Value And Dividend Potential," American Capital is selling at a significant discount. American Capital will pay dividends when the discount narrows. Until then, management is buying back shares.
American Capital receives a 1.25% annual percentage of American Capital Agency's equity. American Capital, Ltd. also collects a 1.5% annual percentage of American Capital Mortgage's equity. Mr. Bernanke wants long term interest rates to remain low through 2015. American Capital will continue to collect a fee on two top performing mREITs.
As long as interest rates remain low, the mREITs should continue to prosper. This will only add revenues to American Capital. American Capital closed today at $11.69. This represents a 30% discount to net asset value per share.
4. Visa, Inc.
I believe the move to electronic payments will only increase over the coming years. Visa is a major leader in this sector. The company is incorporating mobile payments, online payments, physical payment solutions, and smartphone payment solutions. The company pays a 22 cent per quarter dividend. The annual dividend is 88 cents. The annual dividend yield is .70%.
V Total Return Price data by YCharts
Visa's last dividend increase was a 47% increase in quarter over quarter comparison. Management increased the quarterly dividend to 22 cents per share from 15 cents per share.
Management announced a $1 billion buyback plan after the 3nd quarter, ending June 30. Management, during the 3rd quarter, purchased 4.0 million shares, at an average price of $115.51 per share. This amounted to a total cash outlay of $461 million. The reduction in shares increases net income and earnings per share.
Visa's revenue, for the third quarter, was $2.6 billion. This was a 10% increase in year over year comparisons. If inflation becomes a greater factor, the revenue will increase due to higher prices for purchases. Visa can benefit by the benefits of an inflationary effect. Visa receives a fee based upon net revenues. The balance sheet has a debt free balance sheet. Visa remains a play on technological advancements and the need for safe, efficient payments.
5. Agnico Eagle Mines Ltd.
I am investing additional funds in gold and silver production companies. One such name is Agnico Eagle Mines. The company pays an 80 cent dividend, which is a 1.6% annual yield.
Agnico Eagle Mines business model is the exploration, development, and production of gold and silver. Core development areas are located in Canada, Finland and Mexico. These are considered safe locations for gold production. Canada does have higher wage production costs than Mexico. Mexico has fewer red tape requirements to operate mines.
Gold, per ounce, has increased at an amazing rate in recent years. Gold's price increases are significant and based upon the printing press to generate new currency. The gold price has increased at an alarming rate:
As gold continues to increase in price, foreign countries are likely to increase taxes on gold production companies and producing mines. Agnico Eagle Mines mines are in locations which treat the operator with a fair and equitable government and a vibrant work force.
I have added investment dollars to the above five stocks. These names will benefit from the Federal Reserve's action to print money for an extended period of time. I believe these are the ideal stocks to benefit from inflationary pressures.