I have long been a fan of mortgage REIT preferred stocks because their yields have been higher than what is available from most other preferreds and because the credit risk has been very modest, explains Marvin Appel, editor of Signalert's Systems & Forecasts.
Unfortunately, low interest rates have snuffed out a number of past opportunities as preferred shares are being called and replaced with lower yields.
Annaly Capital Management has called all the shares of Annaly Capital class E preferred (NLY-E), effective February 8, 2018. That means that on Feb. 8 our model portfolio will receive $25 per share plus accrued dividends of approximately $0.18.
Once the order to sell the class E preferred is filled we will move into a recently issued preferred stock from the company — American Capital Agency C (AGNCN). The portfolio will purchase AGNCN at the closing price on the day that NLY-E hit the sell level (which may be intra-day).
AGNCN has a coupon of 7% (current yield of 6.76% at the current price of $25.87). It is callable starting on 10/15/2022. If the shares are called at that time then the yield to call would end up being 6%.
If the shares are not called on 10/15/2022 then they switch from a fixed 7% coupon to a floating coupon of three month LIBOR plus 5.111%. The three-month LIBOR is currently at 1.7%, so under current conditions the floating interest rate would be 6.8%.
Note that due to trading scandals, LIBOR will be discontinued in 2021. The share’s prospectus specifies that American Capital Agency will construct its own LIBOR surrogate by polling major money center banks.
