Is AGNC Investment the best dividend stock for you?

There’s nothing inherently wrong with it AGNC Investments (AGNC -0.31%)But it’s not the easiest company to understand. So if you’re looking at a big 14.7% real estate investment trust (REIT) yield and think you’ve found the ideal passive income stock, take a step back and take a deep breath. AGNC Investment isn’t for you. Here’s why.

A few charts tell the AGNC investment income story

Before we dive into the details of what AGNC Investment does, it’s good to provide some context with a few charts. Below is a chart showing the historical dividend yield trend for AGNC Investment. Notice that the yield has always been fairly high. In fact, for most of this mortgage REIT’s history, the yield has been above 10%. In other words, it has long been on the radar of yield-seeking investors.

AGNC Dividend Yield Data by YCharts

This is where the next chart comes in handy: Below, we overlay AGNC Investment’s quarterly dividend on its yield: Notice that the dividend initially spiked, but has generally been on a downward trend since about 2010. This may be a bit surprising, since the dividend yield is a pretty simple formula: the annualized dividend divided by the share price.

AGNC Dividend Yield Data by YCharts

If the dividend is falling, there’s only one way that yield can stay high: for the stock price to fall along with the dividend. The following chart shows that’s exactly what’s happening. So if you bought AGNC Investment with the idea of ​​generating a steady passive income stream and you’re likely to use the dividends for living expenses, you’re likely to make less. and Capital is reduced. This is not what dividend investors want to hear.

AGNC data by YCharts

AGNC investments aren’t all bad.

Remember, AGNC Investment is a mortgage REIT, which is a specialized sector of the real estate market. In effect, AGNC Investment buys mortgages that have been packaged into bond-like securities. AGNC Investment makes money from the difference between the yield on the securities it holds and the cost of investing, which often includes interest expense because it uses leverage to boost its returns. There are a lot of factors at play here.

AGNC Investment’s value is essentially the value of its portfolio, so investors should think of it more as a mutual fund than a REIT. Leverage can magnify gains, but it can also magnify losses. In particular, the leverage used is often backed by mortgage securities in the portfolio, which can lead to margin calls in very tough times. Even the threat of a margin call can force a company like AGNC Investment to make investment decisions it would otherwise want to avoid, such as selling assets during a downturn.

Additionally, it’s worth noting that securities like the bonds that AGNC Investment buys trade throughout the day, as does the mortgage market itself. Changes in interest rates, real estate market trends, and mortgage repayment trends can all affect the value of your portfolio. These are hard to predict and difficult for smaller investors to track. But here’s a really interesting chart:

AGNC data by YCharts

Note that AGNC Investment’s price-only performance is significantly negative, but its total return is significantly positive. Total returns assume reinvestment of dividends. If you use your dividends to pay for living expenses, AGNC Investment is a bad choice. However, if you were reinvesting your dividends, it would have been a much better choice.

Ultimately, AGNC Investment is a vehicle for investors who take an asset allocation approach and focus on total return when tracking performance to gain exposure to mortgage-backed securities, which is not something most small-scale dividend investors do.

Who Should Buy AGNC Investment?

Ultimately, AGNC Investment is not suited to passive income investors looking to create a steady income stream. It is geared towards larger investors such as insurance companies and pension funds that use an asset allocation approach and track performance with total return.

AGNC Investment is not a bad dividend stock, but it is a specialized investment stock. If you are looking for a REIT that pays a reliable dividend as a source of income, you might consider these dividend kings: Federal Realty (FRT 0.34%) Or a major net lease REIT Real estate income (oh 0.26%).