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AGNC: The Power Of Combining The Preferred With Common Equity, Boosting Yield And Upside Potential


  • AGNC focuses on agency MBS which are lower risk than non-agency MBS.
  • AGNC common has seen improved fundamentals.
  • Today, we look at the preferred offerings as well.
  • Looking for a portfolio of ideas like this one? Members of High Dividend Opportunities get exclusive access to our model portfolio. Get started today »

Co-produced with Beyond Saving

In 2019, we have focused on expanding our preferred holdings. Today we take a look at a preferred offering from a company for which we already hold the common shares. By combining the preferred shares with the common, we can get more stability, while still maintaining a very high cash yield.

At High Dividend Opportunities, we have been encouraging our members to take advantage of fixed-income investments like preferred shares and bonds. We recommend a 45% allocation of portfolio to high-yield bonds and preferred stocks. When these are combined with higher-yield common equities and funds, they produce very strong immediate income while managing volatility at the overall portfolio level.

Preferred shares come with their benefits, but they also have drawbacks.

For example, a major attraction of preferred shares is that the dividend is fixed and it has priority over all common equity dividends. This means that the company cannot pay a penny to common shareholders until the preferred dividend has been paid in full. This makes the preferred dividend much more secure.

However, preferred dividends are never raised. So investors in preferred equities miss out on improvements that might lead to higher dividends.

Similarly, the price of preferred shares tends to be far more stable. While it might dip or climb a little bit, investors will not see the same upside that they might be able to obtain with the common shares.

In short, preferred shares provide an opportunity for a more secure and steady income stream, but in return they don’t provide the same upside potential of common shares. The best solution for income investors is to diversify. Preferred equity and bonds provide a base of investments providing a stable, fixed income that we can be very confident will continue uninterrupted during any economic conditions. Then, having provided us with a floor, we

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This article was written by

Rida Morwa profile picture

Rida Morwa is a former investment and commercial Banker, with over 35 years of experience. He has been advising individual and institutional clients on high-yield investment strategies since 1991.

Rida Morwa leads the investing group High Dividend Opportunities where he teams up with some of Seeking Alpha's top income investing analysts. The service focuses on sustainable income through a variety of high yield investments with a targeted safe +9% yield. Features include: model portfolio with buy/sell alerts, preferred and baby bond portfolios for more conservative investors, vibrant and active chat with access to the service’s leaders, dividend and portfolio trackers, and regular market updates. The service philosophy focuses on community, education, and the belief that nobody should invest alone. Lean More.

Analyst’s Disclosure: I am/we are long AGNC, NLY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (43)

ajspjs60 profile picture
I have AGNC common shares and am looking to add preferred shares to my holdings.This will be my first such purchase of such type shares. Looking at the 4 choices, I picked the AGNCM as my pick, meaning I get the reasoning. That is also below par correct, $25.00? So, theoretically the share may rise to Par and collect the dividend, right? Thank you to anyone to take the time and help me understand.
Long NLY and watching both closely
The Value Portfolio profile picture
NLY is definitely one of the best common stocks that are out there.
Rida, no mention of payoff risk for a percentage of their mortgages. Yes, principle is agency guaranteed, but should loans go into default, they are repurchased at par, not 105+/- cost. Is that where hedges help? Does that imply a risk to NAV for the portfolio? Thanks
The Value Portfolio profile picture
Not only do hedges help, but if you look at how much the company's share price has collapsed, that potential 5% drop is already more than priced in.
Rida, on your advice I bought AGNCO and AGNCP last year along with NLYG. They are all below the price I paid for them currently but because they are Preferreds I sleep well at night knowing the dividend is very unlikely to get suspended. I will gladly trade the difference between the Preferreds 7.5% dividend and the Common shares higher pay and possible price appreciation for the assurance I will continue to get paid. The reduced price votality of the Preferreds help me sleep better at night too but they sure did take a big hit for a short period of time. I also have LMRKN on your advice from last year.
PendragonY profile picture

That is exactly why I hold the preferred in those companies as well. Right now the price of the commons makes them attractive, but long term the variability of the common dividend makes the preferreds more attractive.
The CEO just bought 2.3 million worth at 12.6
PendragonY profile picture
Kain bout 189K shares on May 6th, and Fiske bought 15.6K shares on 4/30.

kbaba profile picture
Interesting that Kain also bought 1.6 million $ worth in May 2019 at $17. So much for sell in May and go away
Kain has several accounts for his children and family...the most recent purchase was for his Family Trust so he may be doing some estate planning.
Why would you buy the preffereds from a company in which you already own the common?

In times of trouble share price for both types of stock in one company will generally correlate, adding no real short term stability, or risk reduction to the portfolio. Investing in preffereds and bonds is a good way to reduce risk, but buying preffereds from the same company you already own the common makes no sense to me.

If you think agnc will do good in the short term, buy the common. If you think more pain is coming, buy the preffered.

Buying the preffered from a company you are comfortable with owning the common of only reduces yield with very limited risk reduction.
In my view it would make more sense to diversify and reduce risk by investing in preffereds or bonds that don't correlate with the common stocks you already own.

I am an owner of and long AGNC common, and the preffereds of several other companies.
PendragonY profile picture
@Joachim Ophalfens

You are making the incorrect assumption that the only risk is price action. But we are INCOME investors, and the preferred have a much safer dividend.
Than why keep the common stock in your portfolio instead of completely switching to the preferred if a safer income is what you want?

I am not assuming that risk is limited to price swings. You must have misread the second sentence from my previous comment: “short term stability, OR risk reduction”.

In this case, owning both common and preferred shares of one company the economic risk, inflationary risk, commodity price risk, legislative risk, obsolescence risk, geographical risk, rating risk, headline risk, model risk and interest rate risk are all pretty much the same as it is the same company.
The liquidation and volatility risks are somewhat higher for the common stock than it is for the preferred stock, although they are by far not as secure as bonds. The only difference between the two will be the size of the price changes and the somewhat securer dividend flow from the preferred shares.

In an income portfolio there will almost always be riskier high yield plays and more secure preferred or bond investments. But in every good portfolio risk management is key and keeping both the common and preferred shares of a single company seems to me as ignoring many of the abovementioned risks. The more prudent way to get a secure income stream is diversification that goes beyond the asset classes of one company.

I know you also hold many other stocks and therefor are already diversified, but I still don’t get why you would buy both common and preferred from the same company as the loss in yield is only offset by a minimal risk reduction.

For somebody not owning any AGNC stock yet, both can be good investment opportunities depending on many personal and portfolio factors. Just pick one, picking both is in my view not very prudent portfolio management.
PendragonY profile picture
@Joachim Ophalfens

Try reading the article. The idea is that a mix of holdings can be better than just one or the other.
6019791 profile picture
Thanks for the article. It has been on my radar for a while, so I did a quick skim through and I like what I see. (I'll read it carefully later in the day.) I did a little bit of other DD. It's quite an impressive company. Most people find it scary since it invests in securites that scare the bejesus out of some people. Fortunately, I've gotten over the sub-prime mortgage mess hangover. I own NLY, so not so scary for me. It's moved from my radar screen to watchlist now and perhaps by the end of the day, my 'Buy' list. (dividend cut noted)
The Value Portfolio profile picture
Whenever people get irrationally afraid of a single market is when there tends to be the most opportunity.
Hi Rida, nice article , long AGNC common and EPR, any thoughts on EPR suspending common div ? I intend to stay long EPR. Also MAIN reported Q1 this afternoon ..not bad.
PendragonY profile picture
EPR is a REIT, and that means it will have to pay dividends. Right now, because its tenants are closed it is not collecting rent, but that rent is still due and it still will require dividends from EPR. As soon as things start opening, the tenants will start paying rent, and that will soon result in a resumption of the dividend.
Rida - thank you for this article - I own both AGNC & NLY. Do you have any insight on the commercial mREITs such as BXMT and GPMT?
Rida Morwa profile picture
@novice229 LADR had a reasonably strong report, but it will be an uphill battle for commercial mREITs. The large unknown right now is how many loans will default and that credit risk is going to make or break those mREITs. The longer the country is shut-down, the worse it will get.
The Value Portfolio profile picture
the commercial REITs are solid but they have much less history - especially through the 2008 crash and I'd consider them worse thaan AGNC / NLY in terms of risk.
JMichaelPalmer profile picture
I have held AGNC for several years, my position is significantly down in NAV and they just cut the dividend by 25%. Not good for a retiree. After having been burned I am not inclined to be as sanguine as you are.
Rida Morwa profile picture
@JMichaelPalmer As a pass-through entity, when you invest in AGNC you are essentially investing in the underlying bet that AGNC is making- a levered investment on agency MBS. For several years, with rising interest rates that has been a very poor bet, as spreads restricted significantly. With borrowing rates much lower, spreads are much higher and that will improve cash-flow. As they recover from the volatility, we will see much larger spreads, more cash-flow and the dividends will rise back up.
Added NLY and AGNC. during this difficult time. Especially AGNC adding under 12 to make up what the dividend cut. And I am happy.
Thanks for your article.
The Value Portfolio profile picture
Glad you enjoyed it - let us know if you have any other questions.
Per your advice I purchased NLY earlier. Average cost $9. I'm curious if you think AGNC is a better investment than NLY. Should I switch to AGNC, keep NLY, keep NLY but add any new money to AGNC, or keep adding to NLY ? I subscribe to your thesis that these cos. should do well in a low interest rate environment.
Rida Morwa profile picture
@lewhite AGNC and NLY over the long-term will perform similarly. Currently, the two are positioned quite differently. AGNC has maintained more of their hedges, so if interest rates go up, then AGNC will outperform. NLY has eliminated most of their hedges, so they are better positioned if interest rates stay low or decline. It is typical that one outperforms the other in any given quarter, but overall, we expect them to have similar results.
Thanks, Rida, most helpful. I believe interest rates will remain low for quite an extended period of time. Incidentally, Chairman Powell has said as much, and the Fed will act accordingly. Sticking with NLY for now, maybe even adding to the position. Will consider AGNC later, but the monthly dividend of AGNC is certainly appealing.
For many years I have watched the pundits fight over which is best - NLY or AGNC. My solution? Buy them both. I have been happy,despite recent dividend reductions. Wouldn't be surprised to see NLY reduce again.
Bill Zettler profile picture
With lower rates (LIBOR 3 month at.47 now versus 2.56 1 year ago) aren't the preferreds subject to a much lower rate when they go fixed to floating assuming rates stay low for a few years?
Rida Morwa profile picture
@Bill Zettler If rates stay low, then the floating rate could be lower that the current dividend. On the other hand, if rates stay low, the value of fixed income holdings goes up. The floating rates are LIBOR + 433 bps to +511 bps, so that is a very good spread over LIBOR. So while the dividend would change, we would expect that the value of the preferred would stay near par.
BarkingShark profile picture
thanks Rida, I’ll add a position of AGNCM if it’s down today. I never buy on a Green Day.
Rida Morwa profile picture
@BarkingShark Thank you for reading and commenting, buy low!
AGNCM has a low floating rate. I don't think it should be priced higher than AGNCO which pays a little less now but has a much better floater.
farmed out profile picture
Long both AGNC and AGNCM, so this article will gets a hearty YES from me!
Rida Morwa profile picture
@farmed out my savings Anytime you can get an AGNC below par it is a great thing!
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