AGNC investment (NASDAQ: AGNC) is a very complex matter, but the 15% dividend yield sounds like a siren call to dividend investors traveling along Wall Street. There are many good reasons why income-oriented investors should avoid AGNC, and the mortgage real estate investment trust (REIT) added a new one when it reported third-quarter earnings. Here’s what you need to know before buying AGNC.
A REIT that owns real estate buys a building, such as an apartment or warehouse, and rents it out to generate rental income. That’s pretty easy to understand because it’s exactly what you would do if you owned a rental property. The only difference is the size of assets, with REITs owning institutional-level properties.
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The whole point of a REIT is that it gives smaller investors access to such cash-producing assets, which would normally be beyond their investment capacity.
AGNC is not a REIT that owns real estate; it’s a mortgage REIT. It buys mortgages that are combined into bond-like securities. In some ways, it’s more like a mortgage-focused mutual fund that just happens to trade like a business. Mortgage bonds can be very difficult to follow for small investors.
Factors that influence the price of such securities include interest rates, housing market dynamics, mortgage repayment rates, and even the year the mortgage bond was created (also called its vintage). It is highly unlikely that you, as a shareholder, will be able to keep an eye on AGNC’s portfolio.
There’s another wrinkle here. AGNC Investment is not really an income stock; it is a total return investment. Just take a look at the chart below: Not only has the dividend been volatile over time, but it has also been on a downward trend for years. The share price followed the dividend lower. And yet, if you had reinvested the dividend, your total return would have been strongly positive. The big takeaway here is that if you spend AGNC’s dividend on living expenses, as most dividend investors are likely to want to do, you’ll end up with less income and less capital.
AGNC data by YCharts.
AGNC Investment proudly noted that it sold shares to raise capital when it reported third-quarter 2024 results. That’s not unusual at all; REITs continually issue shares to finance investments. But here’s the strange thing: The CFO noted, “During the third quarter, we issued $781 million of common stock through our ATM program at a significant premium to our tangible net book value.” To simplify that a bit, the company sold shares for more than the company’s stock was actually worth.
Remember that AGNC is similar to a mutual fund. Its value is essentially the value of the mortgage bonds it owns, a figure the company reports quarterly. The book value, which would be comparable to the net asset value of a mutual fund, ended the third quarter at $8.82 per share. The stock’s current price on Wall Street is approximately $9.50 per share. So all AGNC did was sell shares into the market, and it sold those shares at a “significant premium” to what they were worth.
That’s certainly good for existing shareholders, but it seems like it would be a bad idea for most investors to buy something for more than it’s worth. The strange thing here is that this particular thing has a huge 15% dividend yield. That’s a return figure that could cloud the judgment of even the most conservative income investor.
If you’re considering buying this REIT, take another look at the dividend chart above if you actually hope to live off the income your portfolio generates. AGNC Investment is not a reliable dividend stock and probably never will be. Then consider that management is telling you that the stock price is trading at a “significant premium” on the market to the true value of the company.
Here’s the final little complexity of AGNC Investment: it is not intended as an income investment; it is intended as a total return investment. And as the dividend chart above also shows, reinvesting the dividend leads to a solid total return over time. That’s something an asset allocation-oriented investor will appreciate. However, if dividend income is your goal, paying too much for AGNC Investment’s ultra-high yield will likely cause you pain rather than gain.
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.
AGNC has a huge return of 15%. Are investors paying too much for it? was originally published by The Motley Fool
