Stock Pick #6 – American Capital Agency
Recommended by: Bryan Perry, editor of Cash Machine
There’s an ugly rumor going around about how a big dividend must mean there is a tremendous amount of risk attached to a stock. If, by design, a security is structured to pay out most of its profits to shareholders and it can produce 20% profits, then I have no issues with giving management the benefit of the doubt. That’s why I like American Capital Agency (NASDAQ: AGNC) as an aggressive buy for September.
I certainly love the 20% dividend yield, but I also believe there is room for the stock to trade higher. American Capital Agency operates as a real estate investment trust that invests in agency pass-through securities and collateralized mortgages. Assuming the new revised rate of growth for the U.S. GDP is 1%-2% instead of 2%-3%, there is little risk of short-term rates spiking higher and closing the spread in the bond market that makes owning AGNC so attractive. If AGNC can pay out 20% in the current market, then they should be able to maintain it if long-term yields don’t fall much further. Try to pick up this stock at or under $28, and bring some whale-sized yield to your aggressive high-yield holdings.