If you like ultra-high-yield stocks, then AGNC Investment (AGNC 0.97%) and its over 14% dividend yield will probably be on your radar screen. However, when yields get this high you need to step back and make sure you really understand the story behind the company before you buy it. AGNC's story isn't all bad, but it probably isn't the right tale for investors trying to live off of their dividends. Here's what you need to know.
AGNC is not your typical REIT
Real estate is in the name real estate investment trust (REIT), a special type of corporate structure that lets companies pass income on to investors without paying corporate taxes. The intent of the REIT structure is to give small investors the chance to buy into institutional level properties. All in, REITs often are a great option for dividend focused investors.
However, not all REITs are equal. That is particularly true when you bring in a REIT like AGNC Investment. It buys mortgages that have been pooled into bond-like securities, often called something like a collateralized mortgage obligation (CMO). That's not the same thing as buying a physical property, even though AGNC is offering access to institutional-level real estate investments (the CMOs it buys). Mortgage REITs are more like mutual funds than operating companies.
The mortgage REIT sector is fairly complex. For example, interest rates can have an extreme impact on mortgage bond prices. Rates can also impact property markets, which can lead to shifts in the availability of mortgages to be turned into CMOs. In addition, interest rates can impact the rate at which mortgage holders pay down their mortgages, another unique aspect of the CMO puzzle. And since CMOs trade all day, these factors all get priced into the securities on a minute-by-minute basis. As if that weren't enough, most mortgage REITs use debt, often with their CMO portfolio as collateral, which can both enhance returns and increase risk.
This is not a sector that most small investors should be looking at unless they are willing to really dig in and get to understand the mortgage REIT niche very well. And then you can start to look at individual stocks.
Total return over dividends
But the truth is that mortgage REITs like AGNC aren't really meant for small investors. They are designed as total return investments, which assumes dividend reinvestment, that can be used by institutional investors using an asset allocation framework. That's neither good nor bad, but it is very different from an investor who is looking to live off of the dividends they generate from their portfolio.
As the graph above shows, AGNC's stock price fell by more than 50% during the past decade. But the total return was still positive, up nearly 50%. Put simply, if you didn't reinvest the dividends you suffered a huge capital loss over that 10-year span. A big part of that decline is related to the per share dividend, which, as the chart below shows, has been trending lower for years. The share price has simply followed along for the ride.
AGNC isn't a great option for investors looking to generate a reliable stream of dividend income. In fact, if you bought it and used the dividend for daily living expenses you would have ended up with less income and less capital. That's not the ideal outcome for most dividend investors.
AGNC Dividend Yield data by YCharts
What's really interesting about AGNC is that the dividend yield has been elevated across that entire span, as shown in the above graph. That makes mathematical sense, given that dividend yield is the annual per-share dividend divided by the stock price. But it means that this stock has long popped up on high-yield lists despite the fact that, for most dividend investors, it is likely to be a very bad investment choice.
Not worth buying for most investors
If you happen to be an institutional investor looking to add mortgage exposure to your otherwise diversified portfolio, by all means consider buying AGNC Investment. That's not likely the case, however, for most investors. If you are trying to live off of the dividend income your portfolio generates, this is a REIT you should pass on by. A lower yield from a conservatively managed property owning REIT, like Realty Income or NNN Realty, would be a much better option.
