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American Capital Agency Corp. (AGNC - Analyst Report) announced the slashing of its dividend rate by nearly 24%. The company will now pay a third-quarter dividend of 80 cents per share instead of the prior dividend rate of $1.05.

The revised dividend will be paid on Oct 28 to shareholders of record as of Sep 30. Investors reacted negatively to this news, as the stock lost 2.7% during yesterday’s regular trading session.

However, just a day before, following the ‘no-taper’ announcement from the Fed, real estate investment trusts (REITs) have rallied the most. After the Fed’s announcement, Mortgage REITs (commonly referred to as mREITs) like American Capital Agency jumped 5.3% during the regular session on the Nasdaq. These mREITs are expected to recover their ground with tapering being held back until the Fed's forthcoming meeting between Oct 29 and Oct 30.

As a matter of fact, mREITs invest in mortgage backed securities and use short-term debt for financing their purchases to gain from the spread. In the past couple of years, with low short-term rates and quantitative easing policies (QE), mREITs have benefited from lower borrowing costs, leading to higher yields. However, increasing yields on the U.S. Treasury 10-year note have reversed the situation.

Amid volatility in both interest rates and mortgage spreads environment, American Capital Agency reported disappointing second-quarter 2013 results with its net spread income per share of 66 cents significantly lagging the Zacks Consensus Estimate of 85 cents. The company’s book value also declined considerably during the quarter.

The increasing yields on the U.S. Treasury 10-year note continued in July, August and mid-September. Though the recent ‘no taper’ announcement brings relief for the company, we anticipate the volatility in interest rates in most of the third quarter to impact the company’s quarterly performance and hence its dividend payout.

Nevertheless, American Capital Agency Corp. announced that in the third quarter, the company repurchased approximately 11.9 million shares of its common stock, representing 3% of its outstanding shares as of Jun 30, 2013 for $263 million. With this, around 14.8 million shares have been bought back for approximately $347 million since the beginning of the buyback program in the fourth quarter of 2012.

American Capital Agency currently carries a Zacks Rank #3 (Hold). A number of promising stocks that are worth a look include Starwood Property Trust, Inc. (STWD - Snapshot Report), which has a Zacks Rank #1 (Strong Buy) as well as Ares Commercial Real Estate Corp. (ACRE - Snapshot Report) and Blackstone Mortgage Trust, Inc. (BXMT - Snapshot Report) with a Zacks Rank #2 (Buy).

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