For income investors, focusing only on a stock's big yield can be like the terrible outcome you'd expect between a moth and flame. That's something to keep in mind as you look at AGNC Investment (AGNC 0.21%) and its huge 14% or so dividend yield. If that number has you thinking about adding the stock to your portfolio, you need to read more before hitting the buy button.
A different type
AGNC is a real estate investment trust (REIT), a corporate structure specifically designed to pass income on to shareholders in a tax-advantaged fashion. That said, AGNC does not own physical property, like most REITs. It owns mortgage securities known as collateralized mortgage obligations (CMOs). The dynamics of owning a property are fairly simple; you find a tenant and collect rent. The situation is far more complex with CMOs, which are basically pools of mortgages rolled up into a bond-like security that trades based on supply and demand.
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For example, the interest rate environment can have a material impact on the value of a CMO. If rates are going up, the price of older CMOs need to fall in order for the yield to stay in line with current market yields (yield and price go in opposite directions). AGNC's portfolio value declined 37.5% in 2022 alone. Also, housing market dynamics play a role. If home sales and refinancings dry up, then it gets harder to create new CMOs. Rising interest rates have also put a roadblock in front of the housing market of late.
Complicating all of this is the fact that mortgage REITs generally try to increase returns by using leverage. The collateral for that leverage is often the CMOs in the company's portfolio. Leverage helps on the upside, but it can also lead to steeper losses on the downside. And, in a worst-case scenario, it could cause a margin call if the value of the collateral falls too low.
Simply put, before you buy a mortgage REIT, be it AGNC or some other peer, you need to do a very deep dive on the mortgage REIT business model. In fact, the above description is only one of the broad ways in which REITs in the space invest, including AGNC. So there's even more to learn before jumping into the niche, which can be very high risk if you don't understand what you are buying.
The numbers that count
But what about that huge yield? Indeed, 14% is very enticing. But it just can't be relied on when it comes to AGNC. As noted above, price and yield move in opposite directions. Over the past decade, this REIT's dividend has headed steadily lower.
AGNC Dividend data by YCharts
And yet the dividend yield has been consistently high. In fact, except for a couple of brief periods, the yield has usually been in the double-digit space.
AGNC Dividend data by YCharts
The only way that can be achieved is for the stock to fall along with the dividend, which is exactly what has happened here.
If you are a dividend-focused investor looking for reliable dividend payments to support living expenses in retirement, AGNC is not a good investment choice for you. That's not the same thing as saying that AGNC is a bad mortgage REIT. It is merely a recognition of the fact that mortgage REITs like AGNC are not reliable dividend stocks, as the company's history shows.
Caution is in order
If you need your dividends to support your living costs, you shouldn't swing for the fences. Dividend consistency is far more important than a high yield, with traditional REITs like Federal Realty and Realty Income likely to be much better choices. AGNC is a niche investment that only the most active, and perhaps aggressive, investors should own because you'll need to monitor the business very closely at all times.
