AGNC Investment has a huge dividend yield, but that alone isn’t enough of a reason to buy the stock. Here’s why.
If there’s one thing that will catch the attention of a dividend investor, it’s a double-digit percentage yield. That’s probably one of the biggest reasons investors look at AGNC Investment (AGNC -0.10%), given that its yield is a lofty 14.5% right now.
To put that into some perspective, the S&P 500 index (^GSPC -0.03%) is only offering a yield of about 1.2%. But before your judgment is clouded by dreams of becoming a millionaire on AGNC’s dividend, you’ll want to look at what’s behind that payout.
What does AGNC Investment do?
At its core, AGNC Investment is a real estate investment trust (REIT). That’s actually a pretty good start on the dividend front because REITs are designed to pass along income to shareholders in the form of dividends. They have to distribute at least 90% of taxable earnings as dividends to maintain their REIT status, which allows the companies to avoid corporate-level taxation.
AGNC, however, isn’t simply a standard REIT that buys properties and rents them out to generate income. It is a mortgage REIT, which means it buys mortgages that have been pooled into bond-like securities. It uses its capital, and often borrowed money, to buy these mortgage securities, earning the difference between its costs (notably including interest expenses) and the interest it earns on the mortgage securities it buys.
In many ways, it operates kind of like a mutual fund. The value of its mortgage security portfolio is, effectively, the value of the company.
The mortgage market is complex. Interest-rate changes, the housing market, mortgage repayment rates, and even the year in which a mortgage security was created can affect AGNC’s financial performance.
It would be very hard for most investors to fully track what it is doing within its portfolio. This is the first strike against the REIT. If you want to buy it because it offers a 14%-plus dividend yield, you’ll want to make sure you take the time to understand and keep up with mortgage market dynamics.
These AGNC Investment graphs are a big pain point
But what about that lofty dividend yield? If you look back over the company’s history, you’ll see that the yield has always been pretty high.
In fact, it has usually been more than 10%. The current yield is kind of middle of the road if you go all the way back to the company’s initial public offering. At first blush, that suggests AGNC Investment could be reasonably valued today, using yield as a rough gauge of valuation.
AGNC dividend yield, data by YCharts.
That view will likely change when you consider the actual dividend payment over time. As the chart below shows, it has been volatile and, more to the point, has been on a downward trend during the past decade. That changes the story in a big way, since investors who bought the stock thinking they had locked in a big income stream actually ended with a shrinking income stream.
AGNC dividend per share (quarterly), data by YCharts.
The dividend yield graph and the dividend payment graph might seem at odds, but they aren’t. That’s because yield is a fairly simple math equation (the annualized dividend payment divided by the share price equals the dividend yield). The yield staying high while the dividend is falling can easily happen if the share price is falling along with the dividend payment. That’s exactly what the next graph shows, putting all three metrics onto the same graph.
The takeaway from the above graph is that dividend investors would have less income and less capital if they had bought into AGNC’s huge yield thinking they were going to ride it to millionaire status. In the end, they would have ended up with less capital and less income if they spent the dividend on living expenses. That’s an important statement because dividend reinvestment changes the story a little bit.
The REIT’s return, which assumes dividend reinvestment, is fairly close to the total return of the S&P 500 over time even though the share-price-only performance is dismal. This is because the dividend is so large that it more than compensates for the drop in the share price. And that’s why this is such a complicated investment.
AGNC Investment isn’t for dividend investors
Despite a huge yield and being a REIT, this isn’t really an income stock. It is a total-return investment, which requires reinvesting dividends to put them to work.
Sadly, there are no free lunches on Wall Street. If you plan to spend your dividend income, AGNC will not be the kind of stock you want, given its dividend history. However, if you are looking for mortgage exposure, perhaps because you follow an asset allocation investment plan, and intend to reinvest your dividends, it could be a part of a millionaire-making portfolio.
All in, AGNC Investment isn’t a bad company, it’s just not meant for income investors.