What You Need to Know About American Capital Agency

Mortgage REITs are popular with many investors right now for the high dividend yields they currently provide. Sporting a dividend yield of nearly 19%, American Capital Agency (Nasdaq: AGNC  ) is certainly no exception.

Mortgage REITs issue shares to investors to raise capital, which they use to buy mortgage-backed securities. They also use short-term financing to boost their returns. They repay lenders out of the mortgage payments they collect, and most of the rest is returned to shareholders in dividends.

Here's a simple visualization:

Let's take a quick look at four things investors in American Capital-managed American Capital Agency need to know. After that, we'll find out how American Capital Agency stacks up next to its competitors.

1. Interest rate spread
A REIT's interest rate spread is the difference between its financing costs and its interest income. This provides a decent measure of investing profitability -- and portfolio risk.

2. Debt-to-equity ratio
Since interest rate spreads tend to be pretty narrow, REITs like to leverage those returns to generate bigger returns. Companies with safer portfolios can afford to take on more leverage risk than those with riskier investments.

3. Share growth
Since REITs have to pay out the vast majority of their earnings in dividends, the only way to grow their business is to take on more leverage or issue new shares. If a company issues a lot of shares, we want to make sure it does so at attractive prices so investors aren't diluted.

4. Dividend yield
The main reason to buy mortgage REITs is for their dividend. The forward yield tells us what dividends we'll get paid over the next year if earnings hold constant.

Let's see how American Capital Agency stacks up next to its peers in these four crucial areas:


Interest Rate Spread (Q2 2011)

Debt-to-Equity Ratio

2-Year Annual Share Count Growth

Dividend Yield

American Capital Agency 2.46% 739% 245% 18.7%
Annaly Capital (NYSE: NLY  ) 2.45% 576% 24% 14.2%
Chimera (NYSE: CIM  ) 4.20% 189% 24% 16.1%
Hatteras Financial (NYSE: HTS  ) 1.97% 743% 44% 14.2%

Source: Capital IQ, a division of Standard & Poor's.

Founded in 2008, American Capital Agency grew its share count considerably over the past couple of years in an effort to scale up. The bulk of those shares were issued over the past year, when its stock traded between one and 1.2 times book value, suggesting that the company was able to get decent but not amazing prices for its shares.

Like Annaly and Hatteras, American Capital Agency carries a high debt-to-equity ratio. That's because the three tend to invest in ultra-safe "agency securities" -- mortgages whose interest payments are guaranteed by Fannie Mae and Freddie Mac. Because this is the safest type of mortgage to own (from the perspective of possible default), it produces an interest rate spread that's lower than riskier buyers, like Chimera. Though it means taking on greater leverage, and all the potential interest rate risk that may or may not entail, American Capital Agency's high debt-to-equity ratio and moderate interest rate spread allows the company to carry a lower default risk on its investments, while still paying out a juicy 18%-plus dividend yield.

To stay up to speed on the top news and analysis on American Capital Agency, or any other stock, add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks.

Ilan Moscovitz doesn't own shares of any company mentioned. The Motley Fool owns shares of Annaly Capital Management and Chimera Investment. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (0) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1541939, ~/Articles/ArticleHandler.aspx, 10/24/2016 10:19:09 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,240.16 94.45 0.52%
S&P 500 2,152.12 10.96 0.51%
NASD 5,301.83 44.43 0.84%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/24/2016 10:02 AM
AGNC $19.58 Up +0.10 +0.49%
American Capital A… CAPS Rating: ***
CIM $15.51 Up +0.11 +0.71%
Chimera Investment CAPS Rating: ***
HTS.DL $0.00 Down +0.00 +0.00%
Hatteras Financial CAPS Rating: ****
NLY $10.11 Up +0.03 +0.30%
Annaly Capital Man… CAPS Rating: ****