American Capital Agency: The Power of Dividends

The year 2013 was one in which mortgage real estate investment trusts (or, mREITs) completely fell apart, and now everyone is underwater in their investment in the sector. At least, that’s what I keep hearing, regardless of when people claim to have bought the stock. One of my favorite mREITs is American Capital Agency (NASDAQ:AGNC). Both are at multi-year lows. Although 2013 has been damaging, I believe the worst is over. Things seem to be improving. Some have claimed that they have been in this name since its inception and are drowning in the red. When considering their performance, can these investors be underwater?

In this article, I will offer a simple analysis to show that most who claim to be underwater on American Capital Agency since buying in 2008 cannot possibly be true. This is attributable to the power of the dividend. The dividends have paid for this stock and then some since 2008. In fact, anyone holding the stock for three years should be up.

There are two approaches to owning high yielding stocks. The first is to simply collect income In this strategy an investor buys a set number of shares in a company and simply collects the dividend and spends the cash as if it were income from any old source. The second approach, and the one to which I generally subscribe, is to reinvest dividends to buy more shares over time (through say a DRIP plan) and compound one’s investment. In this article, I will cover the dividend/income selection approach.

In the case of American Capital Agency, I know many who started getting involved in 2009 and 2010. Some of these folks have insisted they are underwater. The table on the next page has the details of dividends paid by American Capital Agency since its inception.

Table 1. Complete Dividend History And Cumulative Dividend Paid By American Capital Agency

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As shown in the table, the complete dividend picture for American Capital since inception is provided. As you can clearly see, American Capital has paid bountiful dividends for the last five plus years. The dividend now being at $0.65 is obviously at the lowest it has been since the hypothetical investor purchased. What this illustration shows is the strength of holding a high dividend payer through all the ups and downs. The highest the stock traded before the first ex-dividend date was $20.01 on May 16, 2008.

Let’s assume an investor with bad market timing bought in at $20.00 and never added to or sold their positions. Thus, they purchased shares once, not adding to declines or reinvesting any dividends (although most of you probably would have added on a big decline or two.) Thus, as of the current price of $20.96, this person would be up $0.96 or 4.8 percent. That would be a disappointment after five plus years — but not if we factor in the dividends.

The dividends paid since this buy total $27.61. Therefore, this buyer is actually up $$0.96 plus $27.61, or $28.57 per share. That is their total gain is 142 percent if they were to sell now. But why bother? As of March 2012, all future dividends were gains. Every single dividend paid from now till the stock is sold is ‘free’ money. Now, chances are that American Capital won’t stay depressed for long. In fact, shares are on their way higher as I write. When the shares rebound because of the power of the dividends, larger gains will be had. Everyone who bought in prior to this and collected earlier dividends is likely up nicely.

While the disappointment of a share price that is stagnant from where you may have bought and being paid less to wait for a rebound is not easy to stomach, simply collect more dividends while waiting for the rebound. This analysis further shows that it is impossible to be down on an investment made in mid-2008.

Limitations

This analysis has a few notable assumptions. First, I utilized the highest possible buy-in price on prior to the first ex-dividend date. Ideally, an investor would have timed their buy a little better. Second, I did not assume the investor had added shares at any point which would have impacted the amount of dividends paid and the cost basis. Most investors would add on dips however, and do not generally buy into strength so this possibility would help my analysis. I also assume the investor didn’t sell any positions after substantial capital gains. However, a different result may be obtained depending on the actual prices utilized. In no way is this method a large overestimation of the actual gains. It may even be an underestimation.

Conclusion

For those underwater in their investments, keep reinvesting dividends. It may take time for the macro environment to return to a highly favorable situation like we have from 2010-2012. However, not reinvesting dividends will result in missed opportunities for compounding one’s investment. For those who claim to be underwater on their investments that they purchased prior to 2010, this simple analysis suggests that is not the case, and rather you are up, significantly.

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