American Capital: Pass-Through Profits

08/03/2015 7:00 am EST

Focus: STOCKS

Chris Versace

Editor, PowerTrend Bulletin, Growth & Dividend Report, and PowerTrader

Our latest dividend-focused idea is a real estate investment trust that invests in residential mortgage pass-through securities and collateralized mortgage obligations, explains Chris Versace, editor of Growth & Dividend Report.

Our new recommendation is American Capital Agency Corp. (AGNC); the collateralized mortgage obligations held by the company are guaranteed by government-sponsored enterprise or by the United States government agency.

It is not a particularly interesting business, I grant you, but what is more than interesting is the company’s monthly dividend of $0.20 per share, which equates to an annual dividend yield of 12.6%.

Timing questions continue about Fed interest rate hikes, given the spate of recent data, including a horrible June Retail Sales report.

Indeed, I increasingly find myself agreeing with UBS’ Art Cashin that we won’t see a rate hike in 2015, despite what Fed Chair Janet Yellen has recently said.

We’ll also have to keep an eye on Fed mortgage-backed security reinvestment activity.

But with the shares currently trading at a 23% discount to book value per share and the better-than-10% dividend yield, AGNC shares offer a compelling combination of value and yield at current levels.

Even if the shares themselves are dead money, the annual dividend yield should have the shares outperforming the S&P 500 during the coming quarters.

My long-term price target for AGNC shares is $23, which, when combined with the double-digit dividend yield, offers a total return of more than 30% at current levels.

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