Why American Capital Agency Is a Long-Term Winner

Anything can happen in this market. The year 2013 saw the mortgage real estate investment trusts (mREITs) just get creamed. That said, thus far 2014 is telling a different story. The mREITs are showing some signs of life. Now, I realize that anything can happen to quickly derail this momentum; a natural disaster in the U.S. could send global markets spiraling. Continued mediocre earnings from individual companies could send entire sectors into the red and take your investment value right down with it. Not so hot economic data could weigh big time on the markets. Another rapid rise in interest rates could be detrimental to stocks. But as things stand right now, I question whether one of the bellwethers in the space, American Capital Agency (NASDAQ:AGNC), is a buy at these levels.

Time Is on Your Side

The plain fact is that American Capital Agency has been paying a strong dividend since its inception. Many of my readers who have asked me for advice often cite that they bought in and held strong since 2010 or 2011 when these stocks were first widely being recommended. If you are holding after all of this, remember that any losses are on paper. Why did you buy American Capital Agency? I imagine it was to collect the dividend. Let’s see where someone is who purchased in June 2010 at $27.00 (table 1.)

Table 1. American Capital Agency’s Common Stock Dividend History, Dividends Paid Since June 2010.

Ex Dividend Date Date Paid Dividend Amount Cumulative Amount Paid
6/28/2010 7/28/2010 $1.40 $1.40
9/24/2010 10/27/2010 $1.40 $2.80
12/29/2010 1/27/2011 $1.40 $4.20
3/21/2011 4/27/2011 $1.40 $5.60
6/21/2011 7/27/2011 $1.40 $7.00
9/21/2011 10/27/2011 $1.40 $8.40
12/20/2011 1/27/2012 $1.40 $9.80
3/5/2012 4/27/2012 $1.25 $11.05
6/19/2012 7/27/2012 $1.25 $12.30
9/19/2012 10/26/2012 $1.25 $13.55
12/24/2012 1/28/2013 $1.25 $14.80
3/18/2013 4/26/2013 $1.25 $16.05
6/26/2013 7/26/2013 $1.05 $17.10
9/26/2013 10/28/2013 $0.80 $17.90
12/27/2013 1/28/2014 $0.65 $18.55
3/27/2014 3/31/2014 $0.65 $19.20

Power of the Dividend

As you can clearly see, American Capital Agency has paid bountiful dividends for the last three and a half years. The dividend now being at $0.65 is obviously at the lowest it has been since the hypothetical investor purchased. What this illustration is going to show is the strength of holding a high dividend payer through all the ups and downs. The investor who bought in at $27.00 during June 2010 may represent many of those currently reading this article. Let’s assume 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 share price of $23.20, this person would be down $3.80 or 14 percent. That would be a disappointment after three and a half years, no doubt. But what if we factor in those dividends?

The dividends paid total $19.20. Therefore, the 2010 buyer is actually up $15.40 per share if they were to sell now, ringing in a gain of 57 percent. The only way this changes is if the share prices dropped another $15.40. Assuming this is highly unlikely all future dividends are gains.

Now, chances are that American Capital Agency won’t stay depressed for long. In fact, shares are on their way higher in 2014, up about 13 percent on the year. When the shares eventually rebound because of the power of the dividends, large gains will be had. Everyone who bought in prior to this and collected earlier dividends is likely up nicely. This example isn’t all that fair, because most buyers should build a position on the way down, so most gains are probably substantially higher. While the disappointment of a lower share price from where you may have bought and being paid less to wait for a rebound is not easy to stomach, you can either get out with a gain, or hold and collect more dividends while waiting for the rebound. If you are on the side lines, then you are definitely in a position where a buy is tempting. You have missed the decline and have a chance to secure dividends and potential capital gains.

Disclosure : Christopher F. Davis is long American Capital Agency

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