AGNC Investment Corp. (NASDAQ:AGNC) has a dividend yield over 10% today with the stock having lost about a quarter of its value in 2020. Investors looking for yield have probably seen the name pop up on their stock screens. However, is the fat yield a buying opportunity, or is the steep price decline related to real, long-term troubles? Here's a quick look at the company to help you figure it out.

1. A different kind of REIT

The first thing investors need to understand is that AGNC is a mortgage real estate investment trust (REIT). There are two big takeaways here.

First, REITs are designed to pass income on to investors. In fact, in order to maintain the REIT status and avoid corporate level taxation, these companies have to pass at least 90% of their taxable earnings through to shareholders as dividends. (Since taxes were avoided at the corporate level, investors must treat the dividends as regular income.) 

The second issue of note is that AGNC doesn't own a collection of physical assets, it owns a portfolio of mortgages. Owning mortgages is very different from owning and managing buildings. In fact, the two business models bear virtually no resemblance to each other. Property type, building location and quality, acquisition and construction prospects -- all have little to no meaning here. It's best to think of AGNC as a financing company of sorts, investing shareholder cash in mortgages that have been piled together into tradable securities (called collateralized mortgage obligations, or CMOs).

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2. How AGNC makes a buck

In good times, being a mortgage REIT can be very profitable. Essentially, a company like AGNC makes the difference between its cost of capital and the interest it earns on the mortgage assets it buys. On the one hand, it's a pretty simple concept, with the REIT earning the spread. On the other hand, there are actually a lot of moving parts to consider, including the Achilles heel of the industry -- debt.

3. Leverage

Generally speaking, mortgage REITs use leverage to enhance returns. The problem is that, with no physical assets, the collateral for the debt is the portfolio of assets a mortgage REIT owns. These are traded securities, with values that go up and down over time. Usually this isn't a big deal, but sometimes the capital markets freeze up and mortgage REITs end up getting margin calls. That's when the value of the collateral falls so much that the lender requires more capital to secure the loan. If that capital isn't readily available, AGNC and its mortgage REIT peers could be forced to sell CMOs while they are trading at low prices. Not a desirable situation, and one that doesn't happen often -- but when it does, things go wrong very fast.

It can be incredibly frightening to own a mortgage REIT during periods like this. Early in 2020, with COVID-19 forcing a global economic shutdown, just such a market dislocation occurred. To be fair, AGNC has weathered the storm relatively well, but that still left investors with a 25% dividend cut. 

4. Total return versus dividend income

That said, AGNC's history is filled with dividend cuts. In fact, the company's dividend history since its initial public offering in 2008 is very telling. After heading generally higher for a few quarters, the payment peaked at the end of 2009 at $1.50 per share per quarter. It then started to decline, with the most recent trim marking the ninth time investors have suffered through a dividend cut. The payment has gone from an annualized rate of $6 per share to $1.44. The stock has declined along the way, too. It currently trades around 30% below its IPO price, and more than 60% lower than its all-time high. 

AGNC Chart

AGNC data by YCharts

The yield, meanwhile, has remained generally above 10% the entire time, because for the most part, every time the dividend gets cut, the stock declines along with it. That brings in a very important nuance. Because of the high dividend yield -- assuming investors reinvested that payout the entire time -- AGNC's total return since its IPO is actually around 300%. Financially speaking, management has done a pretty good job. But the problem is that most investors looking at dividend stocks aren't thinking about total return, they are looking to live off the income their portfolios generate while maintaining the value of their principal. If you spent all the dividends AGNC has thrown off, it would have been very disappointing as an investment. 

The final call

At the end of the day, AGNC is down for a very good reason today: Its leveraged business model is facing material financial headwinds. However, even a return to more normal markets wouldn't really make this a great option. Mortgage REITs are a unique investment and really aren't appropriate for most dividend investors, since a sustainable and growing dividend stream is probably the goal -- not total return from a complex investment that has seen its dividend and share price fall for years on end.