2 Big Dividend Yielders And My Rant About Accounting

Core Insights - The article emphasizes the importance of understanding accounting practices in evaluating investment opportunities, particularly in the context of mortgage REITs like Dynex Capital (DX) and AGNC Investment (AGNC) [1][2] - It highlights the differences between Total Economic Returns (TER) and Total Shareholder Returns (TSR) as critical metrics for investors [2][3] Dividend Analysis - DX and AGNC have different dividend payout levels, which must be factored into the analysis of their returns [3] - The article provides a detailed comparison of dividends and returns for both companies, indicating that while the differences are not dramatic, they are significant enough to impact investor decisions [3][4] Financial Metrics Comparison - The financial metrics for DX and AGNC show that as of July 25, 2024, DX's new price is $12.08 with a TSR of$4.75 (22.72%), while AGNC's new price is $10.91 with a TSR of$4.67 (22.72%) [4] - The TER for DX is $4.71 (21.87$2.42 (11.24%), indicating a significant difference in management effectiveness [4] Valuation Discrepancies - There is a noted disconnect in the market valuation of AGNC despite its reported earnings, which are projected at $2.16 for 2024, leading to a low price-to-earnings ratio [5] - The article argues that this focus on earnings without considering the underlying financial statements can lead to misleading conclusions about a company's value [5][6] Hedging Strategies - DX employs Treasury futures for hedging, which allows for greater liquidity and lower margin requirements compared to AGNC's use of LIBOR swaps [8][9] - The article explains that both hedging strategies can yield similar total returns, but the accounting treatment differs, leading to market misconceptions about their performance [11][12] Correlation in Performance - The changes in book value for AGNC and DX are highly correlated, suggesting that both companies are affected similarly by market conditions despite their different accounting practices [13] - The article concludes that the market's perception of AGNC as a superior investment is largely based on accounting differences rather than actual performance metrics [14] Investment Strategy Recommendations - The article advocates for a focus on preferred shares in the mortgage REIT sector, as they typically offer better total shareholder returns with less volatility [16] - It encourages investors to consider trading strategies that capitalize on inefficiencies in share prices relative to book value [28]