You can’t predict the future from the past, but the two often coincide, and AGNC’s past has not been a happy one for dividend investors.
At first glance, AGNC Investments (AGNC 1.27%) With a high dividend yield of over 14%, it looks like a high-yield stock. It’s not, but we need to dig a little deeper into this story to understand why. And, perhaps just as importantly, the value that management wants to highlight from dividend payments isn’t as great as you might think. Here’s what you need to know about the past decade and what it suggests for the next decade.
This AGNC graph tells a disturbing story
To get some high-level issues out of the way, AGNC is a mortgage real estate investment trust (REIT). This is a somewhat specialized area of ​​the REIT sector and is much more complicated than your typical real estate-owning REIT. Essentially, AGNC buys mortgages that are pooled into bond-like securities, making it more like a mortgage-focused mutual fund than a REIT. But the chart below shows why most income investors don’t like AGNC.
AGNC data by YCharts
Breaking this somewhat complicated graph down into its component parts, the key takeaways are simple: First, AGNC’s dividend yield (orange line) has always been high, typically over 10%, but the dividend itself (blue line) has declined steadily over the past decade, and the stock price (purple line) has tracked the dividend decline, which is why the dividend yield has remained high throughout the past decade.
For dividend investors hoping to live off the income from their portfolio, holding AGNC would be disastrous. The next decade may be different, but is it worth the risk?
That dividend came from somewhere.
Typically, the first graph alone would dissuade most investors from buying AGNC. But in its Q1 2024 earnings call, the company said, “From its initial public offering in May 2008 through the first quarter of 2024, the company has declared aggregate common stock dividends of $13.1 billion, or $47.56 per common share.” While the company has certainly paid out hefty dividends, it doesn’t operate a business that appreciates over time. What it owns and actively trades is mortgage-backed securities.
For example, over the past decade, the company’s book value per share has fallen from $23.93 at the end of 2013 to just $8.84 at the end of Q1 2024. This is actually up from $8.70 at the end of 2023. In other words, over the past decade, the company has lost roughly $15 in book value per share, which in this case is basically the value of its mortgage loan portfolio.
So while the REIT could argue that it has paid a large dividend, the payment comes at a large cost in the form of a decline in book value. As book value falls, it becomes increasingly difficult for the company to grow its portfolio because there is less capital available to invest. As a result, less capital is invested in income-producing mortgage securities, making it harder to maintain dividends. To recoup the $15 loss in book value, the mortgage portfolio would have to nearly double in value, which seems highly unlikely even over a 10-year period.
So, given history and the significant decline in book value per share, AGNC’s future likely doesn’t look good for investors looking to live off the income generated by their portfolio. You’d be better off expecting the book value to decline further over the next decade as its large dividend payments continue to drain cash that could be used to buy more mortgage securities from the REIT and increase its book value.
Total return is key when looking at AGNC
AGNC is not inherently a bad investment; it’s just not one that most income-focused investors should be considering. This becomes very clear when you consider the total return assuming dividend reinvestment. Over the past decade, the stock price has fallen nearly 60%, but the reinvestment of the enormous yield has increased total returns by about 30%. This shows the power of dividend reinvestment, but also highlights that using those dividends for spending needs would have been a terrible decision. Given AGNC’s small book value today, this trend is unlikely to change significantly over the next decade.
