When we last visited the Agency Mortgage REIT sector last October, the sector was under siege from both the general market meltdown resulting from the European Debt Crisis as well as sector-specific overhangs. These fears included a massive government mortgage refinance program (didnít happen), collateral fears resulting from the U.S. government debt downgrade (didnít happen), collapsing spreads from falling long-term mortgage rates (didnít happen), European banks failing leading to a REPO dealer blowup (didnít happen), and finally the SEC investigation into the Investment Company Act of 1940 exemption applying to Mortgage REITs (still out there but unlikely to affect the Agency MREITs).
These dividend-rich staples of retiree portfolios have since paid investors 2 dividends averaging a total of 8% on their October share prices. Throw in another 8-10% in capital appreciation and you have a steady-as-she-goes total return in the neighborhood of 14-16% for the basket. Agency MREITs lagged the S&P 500 but investors in these stocks are looking for dividend income and downside protection for turbulent times such as during last August or November.
The volatility in interest rates Ė with 10-year yields rising 15% or almost 30 basis points last week alone Ė is something to watch but on balance only sustained and outsized moves in rates will negatively affect the sector. The initial rise is actually a positive, as slowing prepayments and hedge positions offset part of the decline in book value. Meanwhile, future reinvestment rates are more attractive as the spread between longer-term MBS yields and short-term Fed Funds/LIBOR cost of funds widens.
American Capital Agency (NASDAQ:AGNC) finally trimmed her lush dividend to $1.25 per quarter, but the dividend appears safe at these levels for 2012 and still amounts to a 17% yield at current prices. Hatteras Financial (HTS) actually held her dividend steady at $0.90 per quarter and her more-defensive MBS investments give investors a 12.5% yield at current prices. Capstead Mortgage (NYSE:CMO) with a short-duration portfolio similar to Hatteras also yields about 12.5% after maintaining her dividend at $0.43 per quarter. Annaly Capital Mortgage (NYSE:NLY) has not yet announced her 1st quarter dividend, but assuming the Q4 dividend of $0.57 holds, the stock yields 14% at current levels (Annalyís higher yield and sluggish price likely reflects the absence of long-time CEO Mike Farrell, who is on sick leave). CYS Investments (NYSE:CYS) trimmed its lush dividend 2 times last year to the current rate of $0.50 for a nearly-15% yield.
If there is a current theme surrounding the Agency REIT dividend announcements it was that the narrow spreads were not as bad as the investor and analyst community thought. Dividend cuts were largely met with stock prices moving up, not down. With talk about 1.25% 10-year treasury bonds seemingly as likely as the Indianapolis Colts getting back together with Peyton Manning, the fears of an even flatter yield curve have faded. Last weekís rise in treasury yields and the evisceration of the European contagion flight-to-safety that dominated financial markets from August-November seems to have been abated (at least for now).
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