Here is a potential income generating trade in the SPY, from Jay Soloff....
A "Preferred" Way to Play AGNC Investment
04/03/2019 5:00 am EST
I still like our strategy of preferred stocks and bonds for protection from deflation, Fed financial repression and low interest rates, explains growth and dividend expert Jack Adamo, income expert and editor of Insiders Plus.
With the Fed keeping interest rates steady or even lowering them over the next few years, I think the small risk of rising rates has virtually disappeared. Our latest recommendation is a preferred stock that has a high yield that I think will also eventually translate into capital gain opportunities as investors search for yield.
The AGNC Investment Corp. Dep. Pfd. Rep. 6.875% Cum. Redeem. Pfd. Series D (AGNC-M) is a new preferred from the mortgage REIT AGNC Investment Corp.
Until 4/15/2024 its cumulative dividend is 6.875% per annum ($1.71875 yearly or $0.4296875 per quarter) based on its $25 redemption price; at that price as I write this, the yield is slightly higher.
The dividends are paid quarterly on 1/15, 4/15, 7/15 & 10/15 to holders of record on the record date, which is the first day of the month in which the payment is due. (Note: the ex-dividend date is one business day prior to the record date).
After 4/15/2024 dividends will be paid at a floating rate of the Three-Month LIBOR plus 4.332%. This is considerably higher than our portfolio holding in U.S. Bancorp Fixed/Floating Depositary Shares Non-Cumulative Perpetual Preferred Stock, A (USB-A), which pays the greater of 3.5% or three-month LIBOR plus 1.02%, based on its $25 redemption price.
However, we have purchased all of our USB-A at a substantial discount to its redemption value, so, aside from the slightly higher than advertised dividend rate, we have the possibility of capital gains if the stock is redeemed.
The AGNC Pfd. D is selling near its redemption price, so there's not much chance of capital gain unless the shares rise to a price above redemption that makes it worth our while to sell. That is possible, but unlikely, since the yield is worth keeping, even at a somewhat elevated market price.
Another difference between the two issues is that U.S. Bancorp (USB) is one of the strongest banks in America. AGNC is a very well managed REIT, but its leverage is higher than Annaly's, our other mortgage-backed REIT. Still, its leverage is about what most bank's leverage is, so it's not outrageous.
Jim Grant, who knows this field as few others do, thinks the preferred is secure, though he does not extend that confidence to the dividend level of the common stock. Grant is a very conservative and very competent analyst with decades of experience, so I trust his judgement here. He is definitely in the Smart Money class.
Note that because this is a REIT, it is not eligible for the lower dividend rate, so this stock would be best set in a tax-deferred account, although the yield is high enough to do well even after tax.
AGNC Investment Corp. 6.875% Cum. Pfd. Series D is a buy up to $25.10. Buy the stock only with a limit order, never a market order. Also, be careful, there are two other AGNC preferreds out there. They have higher yields, but are priced above redemption value and are redeemable already, so buying them could cause you to lose money.
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