Is American Capital Mortgage's 16% Yield A Substitute For Agency mREITs?

| About: MTGE Investment (MTGE)

The first quarter run up in the stock market is over and the familiar summer pullback has begun. What assets are still paying good yields with some capital appreciation? Real estate related securities seem to fit the bill. Last September, in the middle of the 2011 correction, I purchased my first tranche of American Capital Agency (NASDAQ:AGNC) at a dividend yield of 20%. I was happy with the first dividend and the stock price appreciation as detailed in this article. I had decided to prepare for this summer's pullback by selling a legacy mutual fund and buying more American Capital Agency in March, even though the dividend had been reduced to $5 per year or 16% yield. However, when I put in my limit order for the stock, it ran away from me and continues to rise in price. I have followed American Capital Mortgage (NASDAQ:MTGE) since last fall and was leery of the non-agency securities that it could hold, even though the price appreciation and dividend increases were good. There is more risk in American Capital Mortgage , due to it's small cap status as a start up mREIT, it's non-agency securities and it's high leverage (8.2x according to the 2011 annual report and10k).

American Capital Mortgage started trading on August 4, 2011 at $18.41 per share. It paid it's first dividend with an ex-dividend date of September 21, 2011. The following table shows dividend growth so far:

Ex-dividend date

Dividend Amount

Annualized Yield










This stock continues to rise and had a secondary offering of 12M shares in early March 2012 at a price of $21.80. As can be seen from the chart, the stock price has continued to rise since that time. I put in my order at $21.90 in the last week of April for a yield of 16.43%.

(Click to enlarge)

Earnings per share for 2012 are projected to be $3.47, while for 2013 they should be $3.59 and 2014 they should be $3.84. The earnings per share growth rate for the next 5 years is 5%. (Data from First Call , FinViz, and Yahoo Finance) The forward P/E ratio is 6.5. It is important to understand growth of a mREIT in order to see why the price of the shares rises with a secondary offering. A good article covering this situation for both American Capital Agency and American Capital Mortgage is "Dilution Vs. Accretion At American Capital's Managed Funds".

My goal is to maintain a 4% yield on my total portfolio. With dividend cuts to some of my holdings, I have had to purchase high yield securities that can maintain their prices during market corrections. I believe that American Capital Mortgage will provide that service along with price appreciation over the long term as the company follows in the footsteps of American Capital Agency. There is diversity in the mREIT sector provided by non-agency securities. According to the 10K form, leverage of the non-agency securities is considerably lower than agency securities, due to higher coupon rates whereas agency securities are levered at 8x with correspondingly lower coupons.

It should be noted that I have stepped up a notch on the risk scale by buying a hybrid mREIT which has more credit risk than agency mREITs. However, with current market turbulence, I feel more secure in mREITs than other sectors of the market. I handle the increased risk through asset allocation, limiting my current exposure to Real Estate at 5% of total portfolio. Once one has been retired for 12 years, safety of principal is paramount, especially during this secular bear market. There is no second chance of going back to work to make up for mistakes. Purchase of high-yield securities is risky and each investor must perform their own due diligence before making an investment.

Disclosure: I am long AGNC. I have an open order for MTGE.

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