AGNC Investment just reported strong Q1 2023 earnings, but don’t rush to buy this high-yield stock. It’s a complex investment.
AGNC investment (AGNC 0.97%) A real estate investment trust (REIT). The dividend yield is very high at 15.3%. Also, financial results for the first quarter of 2023 were strong, book value so far in 2024 is up 1.6%, and earnings more than cover dividend payments. It’s understandable that income investors are drawn to his AGNC Investment. However, before you buy, sell or hold here, you should understand a little about the company’s background.
What does AGNC Investment do?
Although AGNC is a REIT, it is not a landlord like most other REITs. Purchase mortgages that are pooled into securities such as bonds. This is a very different business model than owning physical real estate and renting it out to tenants, and this is very easy to understand. Owning a portfolio of mortgage securities like AGNC is similar to owning a mutual fund.
The big problem is that mortgage securities owned by AGNC Investment are traded throughout the day. As such, they are more volatile than real estate prices, which tend to rise and fall slowly over time. Additionally, bond prices are very sensitive to changes in interest rates, falling when interest rates rise and rising when interest rates fall. Next, we must consider the impact of interest rates on the housing market from which AGNC ultimately funds the mortgages it purchases. Higher interest rates make it more expensive to obtain a mortgage and can reduce home sales. Rising and falling interest rates can also affect how customers pay their mortgages. There is also a very real risk that if interest rates get high enough, some mortgage holders could find themselves in financial distress and defaults could increase.
Simply put, there are a lot of moving parts here, and AGNC Investment is not suitable for investors who don’t want to invest the time and effort to fully understand the company’s mortgage focus.
Sell ​​AGNC investment
That’s a big reason to sell or never buy AGNC Investment. But the chart below really shows why the stock’s high yield makes it unattractive to more conservative dividend investors, despite its strong recent performance.
AGNC data by YCharts
The blue line is the dividend, and you can see that it rises rapidly at the beginning of the graph and then starts to steadily decline. If you’re trying to live off the dividends your portfolio produces, that level of volatility probably won’t work for you. But notice the purple line, which is the stock price. The company has followed suit with declining dividends, leaving dividend investors with less income and less capital after their dividend checks are used up.
Forget about yield. Yields have remained high throughout (this is just a basic calculation of dividend yield) — AGNC has been a disaster for most dividend investors. Is there a possibility that the direction of dividends will change? That’s true, but it’s not likely that dividend fluctuations will disappear.
Buy or hold AGNC investments
So why would an investor want to include AGNC Investment in their portfolio? The answer is that it is actually designed to deliver total return with dividends reinvested. As the graph below shows, while the stock price-only return is in significantly negative territory, the total return is actually positive.
AGNC data by YCharts
As such, it is a good way for investors to add mortgage exposure to a portfolio built on an asset allocation model. That’s not what most dividend investors do. But this is what many large institutional investors, such as pension funds and insurance companies, do. And in most cases, AGNC Investment is a great way to add mortgage exposure to a diversified portfolio if that’s your goal.
probably not for you
If we take a step back and look at the bigger picture, AGNC Investment has proven to be a terrible investment for most dividend investors, despite its consistently high dividend yield. But investors looking to make a living off the income from their portfolios aren’t really the company’s target market. In other words, most small investors are better off simply avoiding AGNC, even though it may be a good fit for institutional investors who take a total return approach.
