American Capital Agency Corporation (AGNC)

American Capital Agency Corporation (AGNC) procures short-term loans, which generally have low interest rates, and buys long-term loans, which generally have high interest rates.  AGNC pursues profits based on the difference between these two rates.  Having said that, the complexity of AGNC's investment instruments are beyond my comprehension.

Most investors who owns AGNC do so for the dividend, which is typically in excess of 10%.  However, this dividend fluctuates based on how well AGNC's portfolio performs.  When AGNC must decrease its dividend, as it had to in 2013, the share price suffers dramatically.  Besides the dividend, another important metric to consider is the net asset value (NAV).  Simply put, NAV represents AGNC's total assets, minus its total liabilities, divided by the total number of shares. Typically, AGNC's NAV should be similar to its share price.  In recent years, however, AGNC's share price has been trading at discounts of up to 20% below its NAV.

One of the knocks against AGNC is that its earnings, and thus dividends, are hard to predict.  To increase its transparency, AGNC has recently begun paying monthly dividends and reporting NAV monthly, rather than quarterly.  This effort seems to have decreased AGNC's volatility, for now anyway.

What to watch for: US bond yields.  The bond yields are indicative of yields on mortgages, which is the primary investment instrument of AGNC.  Specifically, the difference between the shorter term and longer term bond yields dictate how much money AGNC can make.  An additional consideration that is overly prevalent on investors' minds here lately (first half of 2015) whether or not "The Fed" will raise short-term rates this year.  Doing so would immediately increase AGNC's short-term borrowing costs, while not necessary increasing the yield on long-term mortgages.

Common Cents Take: Credit default swaps, options, swaption, dollar roll income - I just don't have the time to understand all of these investment instruments used by AGNC.  Not to mention, these terms came up a lot in the housing market crash in 2007/2008.  I understand the dividend and the NAV that is reported monthly; however, there is no reason to put blind faith in these metrics.  This position will likely find its way out of the Common Cents Portfolio.