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American Capital Agency Maintained Its Dividend

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Aug. 4 2016, Updated 9:04 a.m. ET

Highlights of the income statement

American Capital Agency’s (AGNC) average asset yield in 2Q16 was 2.5%—a big increase from 2.3% in 1Q16. The company’s average cost of funds derived from repurchase agreements, swaps, and other borrowings fell from 1.6% to 1.5%.

The net interest spread rebounded from 0.94% to 1.2%. Interest rates fell pretty dramatically during the quarter. The increase in the federal funds rate will increase financing costs for short-dated loans, especially repurchase agreements. Investors interested in making directional bets on interest rates should look at the iShares Barclays 20+ Year Treasury Bond ETF (TLT).

During the first quarter, American Capital Agency earned $0.46 per share of net spread and dollar roll income, excluding the catch-up premium amortization cost—a function of changing prepayment assumptions. It earned $0.36 in the first quarter.

During the quarter, American Capital Agency earned $217 million in net interest income. This was offset by a $367 million mark-to-market loss on its portfolio.

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Quarterly dividend

American Capital Agency ended up declaring a dividend of $0.60 per share for the quarter. It didn’t change from $0.60 per share declared during the fourth quarter. Unlike most mortgage REITs, American Capital Agency pays a monthly dividend.

In 3Q13, the company paid $0.65 per share. This volatility shows one of the biggest mistakes you can make when you look at a mortgage REIT—annualizing the current dividend and assuming that the dividend yield will stay intact over time. Almost by definition, it won’t. That being said, current yields do provide a useful comparison of REITs.

If we look at big agency REITs, we see that American Capital Agency pays a current yield of 12%, Annaly Capital (NLY) pays 11%, MFA Financial (MFA) pays 11%, and Redwood Trust (RWT) pays 8%.

American Capital Agency’s high dividend yield implies that investors view the dividend as not being sustainable. Investors interested in trading in the mortgage REIT sector as a whole should look at the iShares Mortgage Real Estate Capped ETF (REM).

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