WatchI was in and out of AGNC for a while, and then have been out for good since the beginning of 2012 (?), so I missed most of the climb up and dividends in the mean time..
It has taken a big hit lately...I'm starting to watch it more closely again, anyone with thoughts on this?
I know there has been a lot of press about how QE is going to hurt the spreads, etc...Also they have announced a buyback program, which might be a reaction to fewer good opportunities to invest..
Thoughts, anyone?
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I would stay away.
QE3 is having a huge impact on margins (lower mortgages on fixed rates and prepayments out of higher loans via refinance). A spread of 2.2% to 1.4% is huge. It's all profits, evaporated and likely will get worst in the next Q as more refinance gets pushed through and QE3 buying will make MBS less attactive from a yield perspective (100B X .8% = 800M). Q3 operating income is something like .25 cents which annualize to $1.
In other words, its not a great business, prospectively. Based on the that margin, there is no way they can sustain $5.20 in dividends. I see the margins erosion as permanent.
The headnote comprehensive income is impressive, which is a function of their portfolio unrealized gain built into OCI ("Other comprehensive income"). OCI's are one shot deal. Portfolio value went from 97B to 98B which is ok and reflects that the old MBS were profitable but nowhere offset the impact of margins erosion. It will be hard for them to buy more MBS and if it does, it would be buying them at 1.4% margin which can't sustain their equity release.
This is a case where buy back warrants extreme caution. It's trying to buy time for instuitution to unload over a period of several months. There will be opportunity when a deep dividend cut will be annouced in Feb 2013. They may also choose a different route, maybe go after the non agency backed market which is typically riskier. (my educated guess of course. I think about it from the board of directors perspective).
Caveat, just my opinion only
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I was talking with E-man about selling out on this, when it mentioned the squeeze on their spread, and then "rebounded" to about $33. Then I got distracted for about a week.... Just noticed it took a real hit today again.
When institutions bail, do they allow the price to recover before attempting to sell? Is it worth waiting for a small uptick and dropping my small position, or is this likely going to correct downwards for quite some time? Book value is going to really be hurt by this, and with low rates and QE3 expected for 2-3 years, it doesn't even have a chance to recover.
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Thanks for your insight on that -- helpful and appreciated. I have about 25% of my retirement money collecting dust right now, and I'm trying to find a home for it. I'm gunshy of the "100% in a target retirement account", so I'm trying to do something with it. I am fairly exposed to equities, but have been looking elsewhere (my Lending Club experience has been great so far)...trying not to put too many eggs in any basket, though. REITs seem to come up pretty often on these forums as a good place to have retirement money, hence my interest in AGNC.
Any thoughts on HYI or HIO?
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Also, I wil be hesitant to add any dividend types stock for now.
Bush tax cuts are set to expire on Jan 1, 2013, which means the tax rate and preferred treatment of dividends are set to go up. With Obama, it is a certainty the rich would be paying more and it is as simple as letting things expire and not extend them.
In the case of dividends, it can go up from 15% to over 42% (39% top bracket + 3% medicare surcharge) once the ordinary treatment comes into play and the 3% medicare tax comes into play. 13% state income tax in CA (500K+ household pays that much after prop 30) may bring dividends to be taxed well over 50%. It was a reason a client sold all dividend stocks last week and though nothing of it. This will significantly alter the after tax return of investments like AGNC, HYI, and HIO, etc.
A 10% dividend yield net of tax in 2012 may be 7.5%. Actually CA prop 30 is retroactive so they already have to pay the higher rate on income earned in January 2012.
A 10% dividend yield net of tax in 2013 may be 4.8%.
I wouldn't touch the dividend players until the tax thing is more certain and the equity adjust to the new reality
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Based on SFace's number, the spread is getting squeezed from 2.2% to 1.4%. Just from eyeballing it, AGNC has a good shot of dropping to $20-$22/share.
SFace says
This sucks. Basically, there's no place to shield your investment. That would make real estate even more attractive because you can offset your positive cashflow with depreciation.
Remember that good investment properties will always yield positive cashflow even after offsetting the depreciation and maintenance.
Where do you put your money now? In bonds? :)
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Hmm, wish I had remembered to sell these reits the other day. Thanks for the dividend update, I thought it was 15% to 25%, but clearly it's a lot larger than that! Wow.
I might look at dropping a few good dividend plays then. It can't hurt, and would preserve the capital until this is all over with. I can see a messy ending to this year.
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Well, it's the moment of truth. SPY is sitting right at the 200-DMA. Get ready to buy or hedge your bet.
Good luck to all. :)
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It's ironic that Prop. 30 passed while Prop. 38 didn't. Talking about soaking the rich. Well, gotta take it from the haves and give it to the have nots. Someone gotta foot the bill.
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SFace says
Are you pointing this out because it will put downward pressure on prices, or because it cuts the return? More to the point: if I hold this in a tax sheltered account (IRA), how does that affect things?
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It's less about how it will effect you, and more about how it will effect the rich, who clearly have large stakes in these companies. While you might see the return as pretty good due to your tax status, the rich might revalue their positions and sell.. and sell.. and sell... This in turn will affect how they value a stock and how much they will be willing to pay for it.
Even if you look at it as a great stock, they might say it's a horrible deal until it mints them the 7.5% rate of return again, which might mean cutting the stock price in half to get it there.
It might turn out to be a great deal eventually... and it might give you some great yields at that time too!
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swebb says
Everything else being equal, it will make dividend paying stocks less attractive in general. The main reason people buy them in the first place was the qualified treatment which enhanced the after tax rate of return.
Making them less attractive means less premium, or simply the price will have to come down to compensate. Ever since Obama got re-elected, the right sizing has already occured to anticpiate the tax issue that people expect. But are there more? I think from a rich person's perspective, they will not be buying dividend stocks until at least next year when things are known which means there will be more selling than buying in the short term.
REIT's are still great in a tax deferred account since dividend would still be deferred, but don't buy now, but when the rich are comfortable to hold them again..
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pkennedy says
Nothing is set in stone but here it how it stands as of today:
*Qualified dividend becomes ordinary
* Ordinary income tax rates go back to pre Bush tax cuts (36% easily 39.6% top tax rate)
*Obama medicare tax investment income. Dividends are investment. I think that's 3.6%
So 39.6% + 3.6% = 43.2% federal
CA top tax bracket is around 13% State.
Yep 43.2% to Federal and 13% to California. Why would I own dividends stock so I have the privilage to pay half of it back to the fed and state, might as well buy muni bonds that pay 5-8% exempt from tax and have a higher after tax rate of return without the risk.
This makes dividend stocks very unappealing. If AGNC doesn't pass out $5 and have qualified treatment, no one will buy their shares at $30,. I fully expect AGNC would break support and head to the 20-22 area by January.
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SFace,
Right on. Obamacare is 3.8% tax.
I was calculating my taxes for long-term gain the other day and this is what I came up with. 20% capital gain + 9.8% state tax + 3.8% obamacare = 33.6% in taxes. So for a $3M in gain, I will get to write a check for over $1M in taxes. I'm trying to figure out a way to shelter this gain when I cash out near the top of the next housing market. 1031 will not be a good vehicle at that time. Any ideas?
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No real good ideas,
* Sync your gains and sell all your stock losers or other investment loss to net them up.
* Maybe stop working for a year so your only income was investment income.
* Split up the gains into smaller increments so it doesn't hit the crushing tax bracket.
* let it defer until retirement
* 1031 exchange to defer further.
* Let it defer until Replublicans take control and tax policies are more favorbable.
* Internal dealings to create sham gain at a low/no rate in exchange for loss on max rate.
As of today, that 3M gain in 2017 may be 1.5M dollar check to uncle Sam and Auntie State. I'll think about it some more.. lol
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Well this clearly make sense on why the republican had so many large donors, and why they simply wouldn't give up on these bush tax cuts. They make a huge difference, far more than I realized! I thought it was a general 10% increase, but those cuts were clearly a massive boon to the very wealth for the last decade.
Shoot, had I know that, I would have sold most of my holdings a week before elections :(
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I don't have any stock trading account so there's no losses to offset. All the stocks are in my and wife's IRA accounts.
1031 to defer taxes near the top of the housing market may not be the best idea.
Another idea is to sell houses on installment contract to break up the gain. Since the gain maybe sizable, this strategy may not work either.
There must be a way to shelter this gain & leave it to the kids when I drop dead & they get a step-up in basis. :)
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pkennedy says
Well, if you knew Obama would get re-elected, you should have sold those stocks on 11/6 morning. Remember those qualified dividend, which used to be taxed at 15%, now will be taxed up to your bracket, which could be as high as 39.6%, plus another 3.8% obamacare tax.
I was debating on flipping a couple of my rentals, which would net me close to $200k gain. That means about $18k worth of saving on taxes. However, the timing wasn't ideal. :)
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E-man says
Just talked to my spouse. Her idea is to donate the property to a church with the agreement that you will be their pastor or some other paid position and get paid XXX amount until lifetime. Something to pay you back.
Contribute the property to a (not really) blind trust with your kids as beneficiery. I think funds can be released when they turn X age.
She said these ideas were inspired by Romney.
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Having never owned stocks before the bush tax cuts, I never looked at the tax implications, I didn't know they were going from qualified to ordinary! I figured 10% extra, not a huge deal. Now it makes total sense.
@SFace if Mitt had released his real taxes (not the year he knew he was going to have to release them) and shown us all his great techniques, I'm sure you would have been hitting yourself with so many great techniques you'd over looked over the years :)
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There must be a way to shelter this gain & leave it to the kids when I drop dead & they get a step-up in basis.
Prop 58 allows $1 million (x 2) in tax basis to pass onto the kids without being stepped up. Estate tax exemption drops to $1million in 2013 (barring any changes before year end).
Transfers of the first $1 million of real property other than the primary residences. The $1 million exclusion applies separately to each eligible transferor.
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EBGuy says
Hmm. I thought it was $3.5M each.
So PK and I were discussing how we should shelter our gain earlier today. Based on our projection, our $180k investment will likely yield $800k to $1M return in the next 7-10 years. As of now, it's $200k in the bank and has a very high chance of going up to $400k by the end of next year. Based on PK's projection, it's closer to $500k-$600k. That guy is hell of optimistic. LOL!!!!
Our goal is to cash-out near the top here and 1031 into an apartment complex in a stable market in a flyover State. We will then do a cash-out refinance and use that money for a new development project, maybe in Brazil. Of course, we haven't consulted with a CPA yet.
If the cash-out refinance option is not feasible, we will collect our dividend in the meantime and take the money out to reinvest at a later date after the market here has crashed. Wash and repeat for one more time before we retire. :)