Not all dividends are created equal. Here, we'll do a top-to-bottom analysis of a given company to understand the quality of its dividend and how that's changed over the past five years.
The company we're looking at today is American Capital Agency
Most real estate companies, including American Capital Agency, are organized as real estate investment trusts, or REITs. They do this so that they can get around the double taxation issue that most investors face. REITs don't pay taxes as long as they distribute at least 90% of their income as dividends. The investors holding shares of the REIT then have to pay taxes on those dividends as though they are income. This differs from most dividends, which are taxed at a lower rate.
To evaluate the quality of a dividend, the first thing to consider is has the company paid a dividend consistently over the past five years and, if so, how much has it grown.
American Capital Agency's dividend rose steadily from 2008 to 2009 to a high of $1.50 per quarter. After that it was lowered to $1.40 per quarter, where it has stayed since.
For a mortgage REIT, the most important measure to follow is a company's interest rate spread. This is the difference between the rate the company borrows money at and the rate it lends money out at.
Source: Capital IQ, a division of Standard & Poor's.
American Capital Agency's interest rate spread, while declining, is still very high and will likely remain so until interest rates begin rising again. As the Federal Reserve has stated it won't raise rates until 2014 at the earliest, you have some time before this will happen.
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