For income investors, focusing solely on a stock’s high yield can mean the dire results you’d expect between moths and flames. This is something to keep in mind as you look AGNC Investments (AGNC -0.99%) And its a whopping 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 kind
AGNC is a real estate investment trust (REIT), a corporate structure specifically designed to pass income to shareholders in a tax-advantaged fashion. That said, AGNC does not own physical assets like many REITs. It owns mortgage securities known as collateralized mortgage obligations (CMOs). The dynamics of property ownership are quite simple; You rent and collect rent. The situation is more complicated with CMOs, which are basically pools of mortgages rolled up into bond-like securities that trade based on supply and demand.
For example, the interest rate environment can have a material impact on the value of a CMO. If rates are rising, the price of older CMOs needs to fall to keep pace with current market yields (yields and prices move in opposite directions). AGNC’s portfolio value fell by just 37.5% in 2022. Also, housing market dynamics play a role. If home sales and refinancing dry up, it will be difficult to create new CMOs. Rising interest rates have recently created obstacles in front of the housing market.
Complicating all of this is the fact that mortgage REITs typically 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 big losses on the downside. And, in a worst-case scenario, it could lead to a margin call if the collateral’s price falls too low.
Simply put, before you buy a mortgage REIT, be it AGNC or any other peers, you need to do a very deep dive into the mortgage REIT business model. In fact, the above description is just one of the broader ways REITs invest in the space, including AGNC. So there’s more to know before jumping into a niche, which can be very high risk if you don’t know what you’re buying.
But what about that big yield? In fact, 14% is very attractive. But it cannot be relied upon when it comes to AGNC. As mentioned above, prices and yields move in opposite directions. Over the past decade, this REIT’s dividend has been consistently low.
And yet the dividend yield has been consistently high. In fact, except for a few brief periods, yields have generally been in the double-digit space.
The only way to achieve that is if the stock goes down with the dividend, which is what 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 AGNC is a bad mortgage REIT. It’s just a recognition of the fact that mortgage REITs like AGNC are not reliable dividend stocks, as the company’s history has shown.
Caution is in order
If you need your dividends to support your living expenses, you shouldn’t swing for the fences. Dividend stability is more important than high yield, as with traditional REITs Federal Realty and Realty income Could be a very good option. AGNC is a special investment that should only be owned by the most active, and possibly aggressive, investors because you need to monitor the trade closely at all times.