American Capital Agency (AGNC)

This is a mortgage REIT so they have to pay out in excess of 80% of their operating income, not in the form of a dividend, but from earnings. If the Federal Reserve in the US decides to pull away from the market, they are the ones that are really putting the liquidity into the mortgage market at this point. This is a spread business. They borrow at the lowest cost they possibly can, they buy instruments which yield higher and they take their costs out of the spread and send the rest to you. From a stock price appreciation, they have really been crushed. He can see the 18% yield going forward becoming a 10% yield. You will have to hold these for a longer period of time and hope the mortgage market remains stable.

This is a REIT that holds residential mortgages, so when you get a spike in mortgage rates you get a tailing off of refinancings and will also cause a pickup in early payments. This is a levered play on residential long-term mortgages so it is one of the spaces that an investor concerned about rising rates might step away from. At this point it is too early to say that rates have gone too far, they are more likely to be range bound.

Mortgages. Paying out more than 80% of earnings. The fed is the number 1 player in the mortgage space. He would be cautious if rates are going to move higher. It will be a lower yielding portfolio.

This is affected by 2 things. 1) Short rates. They borrow Short and buy mortgages on the longer end of the curve and they lever that out, which is why they can pay out the huge dividend yield. 2) They were buying bonds effectively at premium and paying 105. As a bond gets closer to maturity, the 105 becomes Par because they pay you back at the price you bought it at which creates a reduction in BV. Part of the $85 billion that the Fed has been buying is also mortgages, which is one issue. This will do worse if short rates go up.

Recently, US REITs such as Annaly (NLY-N) and American Capital Agency (AGNC-Q) have dropped like a stone. Why? Investors are panicking because of rising rates. Worried that the bond market is going to come back and make REITs less attractive because REITs would have to pay a higher dividend. He has a hard time thinking that REITs are going to rise a lot. He would buy these and hold them for the dividends especially because of the Cdn$ versus the US$.

Wall Street Journal reported that the US government is going to take a look at mortgage REITs. When in a low tax environment, US, is trying to find a way to bring in revenue so they are going to sharpen their pencils and will be looking at these guys. They don’t pay income tax which is why they have such a high yield.

Shows a 15% dividend, 120% payout ratio and 8X PE. Too good to be true? Basically an investment firm (REIT) that uses leverage to borrow Short and buy longer-term assets. Has paid its dividend for a long time. Doesn’t see a dividend cut unless you see Short rates go up dramatically or if there is a huge refinancing in the US. One issue is that they are leveraged which is a risk to the portfolio.

A mortgage REIT. Have done an effective job of maintaining their book value, despite the fact that spreads have come down. Leverage is at almost an all-time low. Great management. If your strategy is to hold it for 5 years, you will do very well.

16% yield. It is high but you have to appreciate their business model. Mortgages in the US. They borrow short term and invest in mortgage they are purchasing. Biggest risk is pre-payment by mortgage holders. That has happened recently. But this one is their preferred name in this space. They purchased assets recently that are not as prone to pre-payment. Thinks the yield will be the total return for 12 months.

Some of the mortgage REITs in the US have had a tougher time recently because, in effect, the Feds purchasing program of mortgage backs is squeezing out the mortgage REITs. Good business model. Doesn’t think rates are going to shoot higher in the near-term.

This and similar ones are getting hit because of what the Fed is doing. QE3 buying MBF portfolios mean that the assets they own are going up in value so BV’s are rising. Yields, of course, are going in the opposite direction so there have been some dividend cuts. This company has done very well. Dividend is sustainable for now but the sector as a whole will probably see dividends cut beginning this year and further through the rest of next year. If you are looking for a 10%-12% total yield, you can continue to Hold or add to your position. If you are expecting 15%-20%, right now with QE 3, that’s not in the cards.

Technically, it has reached a bottom. The yield is double digit on all of these, but if you have a change or some concern, they are very volatile. His stop is $30. The downside does not mean he is losing money, but just that it is more volatile. He would buy more than one in this group.

15% dividend . Invests in bonds, many of which were issued since 2008. This is not the right group to be in. It provides yield, but there is risk. Well managed Mortgage REIT. If you believe long term rates are going higher you want to sell, but he doesn't see that. This group probably represents a good entry point right now.

Basically an asset management company. Borrow on the short end of the curve and buy mortgage backed securities and lever those up. Pay out everything in a dividend. The risk to the company is if short rates go up substantially and their cost of borrowing goes up. He doesn’t see this happening in the US for quite a while. Thinks their dividend is safe. Note that once it goes ex dividend, the stock falls so buy it on the ex dividend date. (Sept 19? – Bill)

This is basically a mortgaged backed security but is guaranteed by the US Treasury Department. Do really well when they have .05% funding and they lend out mortgages giving them a very high spread. There is some risk. It will underperform when the Fed starts to gradually raise rates, which is not going to be soon. Should continue to do well. 14.8% dividend.