AGNC Investment (NASDAQ: AGNC) is an interesting stock because of the complexity of what it does. And that complexity bleeds into the way investors need to think about this ultra-high-yield mortgage real estate investment trust (REIT). For some investors, AGNC Investment will be a buy right now. For others it is a stock that will never make sense to buy, despite its huge yield. Here’s what you need to know.
AGNC Investment is a mortgage REIT, which is a complex niche of the REIT sector. You could replicate what a property-owning REIT does, on a much smaller scale, with a rental property. Most investors simply couldn’t do what a mortgage REIT does. To simplify, AGNC Investment buys mortgages that have been pooled together into bond-like securities.
The mortgage securities AGNC Investment buys are impacted by a range of factors, including interest rates, housing market dynamics, and mortgage repayment rates. Management is really doing some hard work as it looks to earn more interest from its investments than its cost of capital. Over the long term, however, AGNC Investment has performed very well, with its total return comparing favorably to that of the S&P 500 index (SNPINDEX: ^GSPC).
More importantly, however, is the fact that AGNC Investment’s total return profile looks materially different from the return profile of the S&P 500 index. This is a huge benefit for investors that are concerned about diversification, making AGNC Investment an appealing addition to an asset allocation model. If that’s the type of investor you are, AGNC Investment could be an attractive buy right now.
To this point the ultra-high 15%+ dividend yield hasn’t been a direct part of the story. That’s because the dividend’s biggest role in total return is that it gets used to buy additional shares. If you don’t reinvest the dividends here, instead using them to pay for living expenses, you are likely to be sorely disappointed with your investment in AGNC.
As the chart below highlights, the dividend can, at best, be described as volatile. In fact, it has been in a decade-long downtrend. And the stock price has been following it lower. Less income and less capital are not what most dividend investors are looking for. Most income-focused investors will be better off avoiding AGNC Investment for this reason.