AGNC Investment (AGNC 1.26%) is a real estate investment trust (REIT), but it isn’t a landlord, as are most REITs. This changes the equation for investors and could make the ultra-high 13%+ dividend yield a bad choice. But, if you understand what you are buying, there is a reason to buy this REIT today.
What does AGNC Investment do?
Most REITs buy physical properties, but AGNC Investment is a mortgage REIT. It buys mortgages that have been pooled together into bond-like securities. These securities trade all day, and their prices can — and do — change dramatically based on factors such as interest rate changes, property market dynamics, and mortgage repayment rates, among other things. While you might be able to keep fairly close tabs on a property-owning REIT, it would be very difficult to track AGNC Investment, or any other mortgage REIT, with the same level of certainty.
Image source: Getty Images.
AGNC Investment makes the difference between the interest it earns on the securities it buys and its cost of capital. The cost of capital notably includes the interest costs of leverage that uses the portfolio as collateral. This adds another level of risk to the equation, since a drop in the value of the portfolio could potentially trigger a margin call. That, in turn, could force AGNC Investment to sell assets into a market downturn.
If you are an income investor looking for a simple to understand REIT, you probably won’t want to buy AGNC Investment, even though it has a huge dividend yield. In fact, if you look at the history of the dividend and the stock price, you will notice a very frightening trend, given that the dividend has declined steadily for years and, not shockingly, so has the stock price. That wouldn’t be a good outcome if you are hoping to have a material source of income today and for some distant tomorrow.
AGNC data by YCharts
AGNC Investment: Not right for all, but perhaps right for some
A traditional dividend investor, who is looking to live off the income their portfolio generates, would probably see AGNC Investment as something of a yield trap. Indeed, long-term investors would now have less income and less capital coming in the door. A better option for such investors would be a company with a long history of regular dividend increases, like the companies that make up the highly elite group known as Dividend Kings.
But there are some investors who might still be interested in AGNC Investment. And a key reason for that is the stock’s total return, which, despite the falling stock price and declining dividend, is strongly positive. How does that math work?
AGNC data by YCharts
The first answer is dividend reinvestment, which is a key component of total return. If you examine AGNC Investment’s dividend history, you’ll see that it paid $48.64 from its initial public offering through to the end of 2023. But the share price has only declined around from $20 per share at the IPO to $10.50 or so. This means that the mortgage REIT has paid out nearly $40 per share in dividends over and above the share price decline. If dividends were reinvested, it would more than offset the declines in stock price to generate a positive return.
Although it requires some deep consideration, there are three reasons to buy AGNC Investment given this fact.
1. You are an asset allocator looking for mortgage exposure
Asset allocation basically requires investors to spread their investment portfolio around a bit. If the list of assets you want exposure to includes mortgages, then AGNC Investment, given its total return, is actually a decent option. But in this scenario, the goal is exposure to mortgage securities, not income. If you are planning to spend the dividends, you could end up disappointed by the outcome.
2. You are willing to give up capital for income
For some income investors, meanwhile, the trade-off that AGNC Investment offers might be worthwhile. Yes, the stock has lost over half of its value since its IPO. But it has paid out far more in dividends. The caveat is that the income stream has trended lower over time, so AGNC Investment remains a bad choice for investors who need to have a sustainable and/or growing income stream. But if you can wrap your head around the nuance here between the dividends and the drop in the share price, there could be a place for an investment like AGNC in your portfolio if you aren’t worried about leaving anything behind for heirs.
3. You have a shorter investment horizon
All of that said, the share price of AGNC Investment will normally track closely with the value of the securities it owns in its portfolio. The price of the portfolio, which the company reports quarterly as tangible net book value, usually doesn’t change dramatically from quarter to quarter (though it can during housing market and stock market dislocations). Meanwhile, AGNC Investment pays dividends on a monthly cadence. If you are looking to generate as much income as possible over a short period of time, the ultra-high yield here might be worth the risk. Just make sure that you are thinking in months, and not years, if you are thinking about AGNC Investment in this way.
AGNC Investment is a nuanced investment choice
If you are trying to fund your retirement with dividend income, AGNC Investment probably won’t be the kind of stock you want to own. Thus, most dividend investors will likely want to avoid this ultra-high-yield REIT. But given the dynamics of the dividend and the share price, total return investors who are looking for a mortgage investment might like it. So, too, could investors who can wrap their heads around the complex interplay between dividends and share price. And then there’s a small group who may appreciate the large monthly pay dividend as a way to generate some additional short-term income.
