Another virtual bank (AGNC) for high interests

You probably know I love Annaly (NLY), which I call it a virtual bank because it, although not a real bank, pays you a high interest at about 14% and at the same time it is critically importantly that it is very safe under certain circumstance. Why? Because it buys government-backed residential mortgage securities; as such it virtually has no credit risk. When the Fed rate is low as it is now, it can borrow money cheaply and lend money at a relatively high rate. The difference between the borrowing and lending rates is where its profit comes from. Since it is set up as a real estate investment trust (REIT), by law it must pass 90% of its earnings to its shareholders in order to avoid paying the corporate tax. As you know, Benanake has kept the Fed rate at near zero for 2 years by now and there is no chance that he will be able to raise the Fed rate any time soon due to the very depressing economic situations right now. The current consensus is that the Fed rate will be kept at this near zero level till at least the end of 2012. In other words, it is quite safe to invest in virtual banks for at least another 6-12 months. The price action of NLY in the past few weeks is a kind of verification of this analysis. Actually it is a bit beyond my expectation that its share price is kept appreciated beyond $18. I have bought NLY for over 2 years. Not only I have enjoyed its high dividends and capital gains, I have also used options to juice my incomes from it. With all these, my return has been much more than double my initial invested capital.

I just found another virtual bank, which has the exact same set up as Annaly but pays much better dividends. Its dividend yield is around 19%. The company is called American Capital Agency Corp. (AGNC). From the investment point of view, I like AGNC more than NLY, given its consistent better performance in the past year but a relatively weakness in its price in the past few weeks, i.e. a better entry point. It just announced that it is planning its largest stock offering since going public three years ago, potentially raising more than $1 billion to fund its investments. The offering is expected to close on June 28, 2011. So its price will likely remain weak or even drop a bit further due to this share dilution. I'd take this weakened price as a good opportunity to establish positions for this high dividend yield. A trailing stop (TS) should be in place to protect your capital for any unexpected risks. Maybe a 15% TS is a good cut but you may make it more tight (say at 10%) or more loose (say at 25%) depending on your personal risk tolerance.