Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



More Good News for the Market's Hottest Dividend Sector?

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

There's been a lot of concern recently regarding the yields of mortgage real estate investment trusts, but the recent results at American Capital Agency (Nasdaq: AGNC  ) might help ease some of those anxieties.

The company reported earnings of $250.4 million, up from $60 million in the year-ago quarter. The company also plumped up book value by $0.14 sequentially, to $26.90 per share.

But perhaps more importantly, the company's interest rate spread was down only slightly year over year, falling to 2.14% from 2.21% in the year-ago quarter. However, the spread at quarter end has narrowed still more, down to 1.94%.

That narrowing could be a concern. American Capital's spread has declined from 2.58% in the first quarter to 2.46% in the second, ending up at 2.14% in this most recently reported quarter.

Fading rate spreads have been an area of anxiety for mortgage REITs, since the companies make money by borrowing at low short-term rates and then buying higher-yielding long-term mortgage securities. While Federal Reserve rates are still anchored at near-zero levels, investors have been concerned that precipitously declining mortgage rates will cut into profitability.

Those worries have pummeled shares of American Capital and peers such as Annaly Capital (NYSE: NLY  ) and Chimera (NYSE: CIM  ) in the last month or so. Fellow mortgage REIT Armour Residential (NYSE: ARR  ) has also been hurt. The latter three businesses report earnings in the next few days. Last week CYS Investments (NYSE: CYS  ) reported declining earnings but saw its rate spread expand year over year. However, its spread declined sequentially, as did American Capital's.

American Capital has taken steps to limit some of the volatility caused by recent market dislocations. It is using longer-term repurchase agreements in order to provide more stable funding for its portfolio and is taking a closer look at its counterparty exposure. The company also estimates that it has low exposure to the recently announced changes to the Home Affordable Refinance Program, with less than 5% of its portfolio eligible for the revised program.

It will be interesting to see how other mortgage REITs respond to the quarter's volatility and whether they have taken similar steps to secure their positions.

Of most interest to investors in this space is the dividend. American Capital declared a dividend of $1.40 per share, as it has since the third quarter of 2009. And the company's yield sits near those of peers, as you can see in the table below.









American Capital Agency


Hatteras Financial (NYSE: HTS  )


Armour Residential


Invesco Mortgage (NYSE: IVR  )


Source: S&P Capital IQ.

While volatility has been the name of the game in the latest quarter, there still looks to be plenty of strong tailwinds for the sector, including near-zero interest rates till mid-2013 and a lackluster economy. The results at American Capital help bear that out.

Stay tuned as we hear shortly from one of the best players in the space, Annaly.

If you like dividends, also consider the 11 names from a brand new free report from Motley Fool's expert analysts called "Secure Your Future With 11 Rock-Solid Dividend Stocks." Today I invite you to download it at no cost to you. To get instant access to the names of these 11 high yielders, simply click here -- it's free.

Jim Royal, Ph.D., owns shares of Annaly. The Motley Fool owns shares of Annaly and Chimera. 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 (5)

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: 1577474, ~/Articles/ArticleHandler.aspx, 10/21/2016 9:58:52 PM

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 42 minutes ago Sponsored by:
DOW 18,145.71 -16.64 -0.09%
S&P 500 2,141.16 -0.18 -0.01%
NASD 5,257.40 15.57 0.30%

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

10/21/2016 4:00 PM
AGNC $19.48 Down +0.00 +0.00%
American Capital A… CAPS Rating: ***
ARR $22.46 Up +0.10 +0.45%
ARMOUR Residential… CAPS Rating: ***
CIM $15.40 Up +0.10 +0.65%
Chimera Investment CAPS Rating: ***
CYS $8.39 Down -0.03 -0.36%
CYS Investments CAPS Rating: ****
HTS.DL $0.00 Down +0.00 +0.00%
Hatteras Financial CAPS Rating: ****
IVR $14.80 Up +0.04 +0.27%
Invesco Mortgage C… CAPS Rating: *****
NLY $10.08 Down -0.05 -0.49%
Annaly Capital Man… CAPS Rating: ****