Background: American Capital is a newly-organized Delaware corporation formed to invest exclusively in single-family residential mortgage pass-through securities and collateralized mortgage obligations for which the principal and interest payments are guaranteed by a U.S. government agency or a U.S. government-sponsored entity. The company will elect to be taxed, and intends to qualify, as a real estate investment trust for federal income tax purposes. American Capital trades an average of 5 million shares per day with a marketcap of $12.5 billion.
52-Week Range: $22.84 - $36.72Yield: 13.63% You might be wondering if I made an error in the yield. Nope, it's not a mistake, and unlike many stocks with oversized dividends, few are expecting the dividend to drop anytime soon. To assume that the risk isn't at least slightly elevated is naive, however, the Fed with QE3 and a bottomless checkbook is providing incredible lift in real estate related stocks. When will the party end? No one knows, but expect a significant drop in share price when the market re-prices the yield spread American Capital is currently receiving. American Capital is also juicing returns through leverage, which may present risks that are difficult to fully price in. Based on the surface level numbers, the model appears to be solid for the near term, if the Fed keeps the party going and the stars remain aligned. At the time of publication, shares began trading ex-dividend once again after the most recent dividend of $1.25 for a total of $5 annually. Because American Capital is a pass-through entity, the company is required to pay most of their earnings in dividends. The minimum payment requirement tends to make dividend payments relatively volatile because of the ups and downs of profits. In the last three years, the average dividend paid per year was $5.45 per share. If you're in the mood to allocate capital into "high"-risk mortgage-backed income, albeit government-backed mortgages, American Capital is worth a look. Of course, if American Capital "only" makes the $3.77 that analyst estimate, don't expect $5 in the next year for dividends. I won't likely buy shares, but I may trade in the options that are available for essentially zero time premium in front of ex-dividend dates. The risk of a price drop resulting from a decline in dividend payments is too great for me to entertain. In the last month, the stock performed well with a 7.7% increase and the last reported short interest is small at 1.4%.
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