Real estate prices are rising, and in many cities, are back to
where they were before the 2007-2008 housing market crash. And
mortgage rates are still quite low on a historical basis.
American Capital Agency Corp. (Nasdaq:
invests in residential mortgage pass-through securities and
collateralized mortgage obligations for which the principal and
interest payments are guaranteed by the U.S. government or a
Structured as a real estate investment trust (REIT), it
distributes at least 90% of its taxable income to its
shareholders. Here is what AGNC looks like over the past
The stock is now above its 20-day (red line) and 50-day moving
averages (blue line). Also notice that the red line has started
to penetrate the blue line, which tells us momentum is currently
on the upswing.
Next is a chart comparing AGNC (green line) with the Dow Jones
Equity REIT Index:
#-ad_banner-#As you can see, the sector exchange-traded fund (
) is also on the upswing, but at a faster rate than AGNC.
Therefore, AGNC has the potential to catch the index's
On the fundamental side, the consensus earnings per share (
) estimate for next year is $2.58, giving the stock a
price-to-earnings (P/E) ratio of less than 8. That is less than
half of the sector average of 16.4.
AGNC pays a $0.65 quarterly dividend, which amounts to a
current yield of 12.8%. But we can turbocharge the income on this
high-yielding stock with a
covered calls strategy
A call option is an option to buy or sell shares at an
agreed-upon price (the strike price) within a certain period of
time. The buyer of a call option purchases the right (but not the
obligation) to buy the shares at the strike price.
The seller of a call option (also known as the writer) sells
the right to the buyer for a payment known as a premium. In doing
so, the seller assumes the obligation to deliver the shares at
the agreed-upon price should the buyer choose to exercise her or
With AGNC trading at about $20.55 per share at the time of
this writing, we can buy 100 shares and simultaneously sell a
March call option with a $21 strike price, which is currently
trading for about $0.50 and expires on March 22.
Since we receive $0.50 for selling the call, our net cost is
lowered to $20.05 per share. To give you some wiggle room, I like
this trade at a net cost of $20.20 or less.
Here's how this covered call trade could work out:
If the shares rise above the $21 strike price, the buyer will
buy the shares from us at $21, giving us a gain of at least $0.80
per share, or 4% in 58 days. This works out to an annual rate of
return of 25%.
If AGNC trades lower, we would not experience a loss unless it
falls below our net cost of $20.20 or lower, giving us a cushion
of at least 2% at current levels.
If AGNC is below $21 on the third Friday of March, then the
call option will expire worthless. We then have the ability to
sell another call option against the shares to generate more
income and lower our cost basis further.
Action to Take -->
The current price of the option is about 2% of the stock's price.
Selling an option for that amount every two months would generate
income of about 12% a year. That means you could potentially
bring in enough income in a year to almost double this stock's
already generous yield.
So using a covered call strategy allows you to generate income
as you wait for more upside in AGNC, while protecting yourself on
the downside and collecting a fat dividend.
This article was originally published at
How to Almost Double Your Income on This 12.8%
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