It was a volatile year for shares of American Capital Mortgage Investment Corp (NASDAQ: MTGE), which mostly traded in a range of $19-$20.50 throughout the year. Though fairly volatile, shareholders are looking at a positive return of 13% year-to-date, whereas shares got massacred in 2013 with a loss of 27%.

Despite a weak 2013, which comes after an extremely strong performance in 2012, American Capital Mortgage has a lot to offer for risk-seeking and yield-hungry investors.

Investment strategy and portfolio
American Capital Mortgage is a relatively small mortgage REIT with a market capitalization of only $1 billion. Probably the biggest difference to other, established mortgage REITs is that American Capital Mortgage invests in both agency and non-agency securities to earn a spread between the yield on its securities and its funding costs.

Apart from buying and selling agency securities -- these are securities where a government-sponsored enterprise or Ginnie Mae guarantee principal and interest payments -- American Capital Mortgage also invests in collateralized mortgage obligations, non-agency residential mortgage-backed securities, prime and non-prime mortgage loans, commercial MBS, and other related investments.

In a nutshell, mortgage REITs that invest in non-agency securities and non-prime loans have a higher risk profile than REITs that solely invest in agency securities, because they also face significant credit/default risk.

However, American Capital Mortgage's allocation to non-agency MBS is not aggressive: At the end of the third quarter, its investment portfolio contained $6.4 billion in assets, of which only 17% related to non-agency MBS, or approximately $1.1 billion.

Source: American Capital Mortgage Third Quarter Earnings Presentation

Performance and dividend history
When it comes to American Capital Mortgage, some investors might feel uneasy about the short operating history of this mortgage REIT, but this is not really warranted.

American Capital Mortgage had its IPO just a short while ago, in August 2011, which in turn leads only to a short earnings and dividend history. Plus, conducting an IPO in 2011 was probably not the best moment to go public, because mortgage REITs ultimately fell off a cliff as investors started to expect tighter monetary supply going forward, and lower dividend payouts.

Anybody who buys mortgage REITs has to understand that they are volatile investments, and a fantastic year, like 2012, can quickly be followed by a devastating one, like 2013, which saw massive value destruction in the mortgage REIT sector.

Despite some weak periods in between, American Capital Mortgage can still present investors with an economic return of nearly 16% since inception.

Source: American Capital Mortgage Third Quarter Earnings Presentation

Dividend cuts, which followed the softer financial performance in 2013, also affected American Capital Mortgage: The mortgage REIT cut its payout from $0.90 per share at its peak in 2012-2013 to $0.65 per share in the most recent quarter.

Nonetheless, American Capital Mortgage has now held its dividend steady for the last four quarters, which indicates that the dividend adjustment process has already come to an end, and investors can look forward to less volatile dividends.

Source: American Capital Mortgage Third Quarter Earnings Presentation

Despite the cutback, American Capital Mortgage still has a respectable dividend yield of 13.2% (data courtesy of S&P Capital IQ).

Valuation
Many mortgage REITs, whether large or small, continue to trade at book value discounts, which are the consequence of a series of dividend cuts in the past.

American Capital Mortgage is no exception here: The mortgage REIT trades at a 12% discount to its net asset value, while peer firm MFA Financial (MFA 1.46%) trades at a 6% book value discount and Capstead Mortgage (CMO) already manages to trade at book value.



The Foolish Takeaway
For investors who can go along with exposure to a non-agency MBS portion of American Capital Mortgage's investment portfolio, and who don't mind a relatively short performance history, the mortgage REIT could be an interesting addition to income oriented investment portfolios.

With a purchase of American Capital Mortgage, investors could not only benefit from a handsome 13% dividend yield, but potentially capital gains, too.