Real estate investment trusts (REITs) are designed to pass income to investors in a tax-advantaged manner. So it’s understandable that dividend investors pay a lot of attention to REIT dividends and yields. But every REIT shouldn’t be judged by its returns, and that’s a perfect example AGNC investment(NASDAQ: AGNC)which has a huge dividend yield of 14.9%. This is why income investors should approach AGNC Investment with caution.
Before we delve into AGNC’s business, it pays to simply look at the mortgage real estate investment trust’s dividend history. As the chart below shows very clearly, investors who were attracted to the high dividend yield on offer here have not added a reliable dividend stock to their portfolio. After a rapid increase in the size of the dividend (the orange line), it shifted gears and moved steadily lower.
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AGNC data by YCharts
Not surprisingly, the share price (the purple line) followed the dividend. First it rose and then it fell. However, what stands out more here is the blue line: the dividend yield. That line has remained high throughout, which is a simple function of the dividend yield formula. However, that high yield means AGNC looked like a high-yield dividend stock, even though it offered less income and its share price fell.
Income-oriented investors who would buy AGNC Investment in the hope of securing a reliable income stream would have been left in the lurch. If an investor had spent the dividends generated here, he would have been left with less income and less capital. That’s a terrible outcome.
Image source: Getty Images.
The interesting thing about AGNC Investment is that it is upfront about its performance goals. On its investor website, it describes its objective as “Favorable long-term shareholder returns with a substantial return component.” This requires a bit of parsing. A dividend investor might think of shareholder returns in terms of dividend yield, especially given the emphasis of “a substantial return component” in the objective. But shareholder returns are normally viewed in terms of total return, a measure that assumes reinvestment of dividends over time. Assuming dividend reinvestment makes it possible to compare dividend-paying investments with non-dividend-paying investments.
In short, AGNC Investment is not necessarily looking to provide shareholders with a high dividend yield. It aims to create large total returns over time. And it has succeeded, with the ‘performance’ segment of its website cheerfully reporting that total annualized stock returns since inception are about 10.8% per year, compared to 6.8% for financials, 5.3% for REITs and 5% for mortgage REITs. a group. The explanation of the performance graph shows that the figures presented are based on dividend reinvestment.
All in all, AGNC Investment is very clearly telling investors that it is not a return investment. The dividend history also clearly underlines that fact. If you want to live off the income your portfolio generates, you probably won’t be satisfied with an investment in AGNC Investment. Even if the dividend were to rise at some point in the future, there is always the very real risk that it will fall again. That’s exactly the way AGNC Investment works as a company and, just as importantly, not the way most dividend investors think about their portfolios.
All of this begs the question of what type of investor should buy AGNC Investment. They are clearly not income investors. But if you’re using an asset allocation model and want to add mortgage exposure to the mix, this could be a good solution. You just need to understand that you need to reinvest the dividends if you want to maximize your returns. Most dividend investors do not fall into this category of investing, which generally falls under the purview of institutional investors such as pension funds.
Overall, AGNC Investment probably isn’t a great dividend stock, but that’s not what it’s trying to be. That said, AGNC Investment is a pretty good total return for those looking to invest in the mortgage industry – and that’s exactly what the REIT is trying to achieve.
Consider the following before buying shares in AGNC Investment Corp. buys:
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Dividend Investors, AGNC Might Not Be What You Think It Is Originally published by The Motley Fool
