If you've spent any amount of time looking for stocks that pay big dividends, you've probably run across AGNC Investment (AGNC 0.99%). At the moment, shares of this real estate investment trust (REIT) offer an eye-popping 11.5% yield.
When an ultra-high-payout stock like AGNC Investment shows up on your radar, it can be tempting to hit buy now and worry about the details later. Before pulling any triggers, though, there are a few things about this company and its dividend that you should know.
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1. AGNC Investment is a mortgage REIT
REITs are popular with income-seeking investors nearing retirement because they are the polar opposite of growth stocks. By design, REITs don't need to pay income taxes as long as they share nearly everything they earn with their shareholders in the form of dividends.
AGNC Investment is a specialized REIT that doesn't even buy real estate. It's a mortgage REIT, or mREIT, that borrows at relatively low short-term rates to buy heaps of residential mortgage-backed securities that are guaranteed by the U.S. government.
2. Now is a historically tough time to be a mortgage REIT
AGNC Investment's price has been sinking because the Federal Reserve is pressuring the mREIT business from two sides. Increasing the benchmark interest rate will drive up the company's cost of capital. At the same time, the Fed is hammering the market value of mortgage-backed securities by telling everyone it plans to stop buying them in bulk.
Mortgage-Backed Securities Held by All Federal Reserve Banks data by YCharts
In March of 2020, the Fed started buying mortgage-backed securities with both hands, and it's been inflating its balance sheet ever since. The Fed has been signaling an end to these asset purchases, but, as you can see, the number of mortgage-backed securities on its books is still rising.
There are a lot of ins and outs when it comes to valuing mortgage-backed securities, but less demand generally leads to lower prices. Once the Fed's actions actually match its words, the value of assets on AGNC's balance sheet could fall significantly along with its stock price.
3. Rising interest rates aren't necessarily bad
Tapering asset purchases could cause AGNC Investment's book value to tumble in the near term. Savvy income investors will buy some shares of AGNC Investment now, and more if it dips, because higher interest rates can also work in the company's favor over the long run.
30 Year Mortgage Rate data by YCharts
AGNC Investment's costs of capital are rising, but mortgage rates look like they're rising even faster. Nobody wants to refinance while rates are rising, so we can expect fewer prepaid mortgages and, in turn, more predictable cash flows in the years ahead. Higher rates can also provide a wider gap between AGNC's short-term borrowing costs and the returns it receives on new mortgage-backed securities.
Shares of AGNC Investment could fall hard when it reports first-quarter earnings if the Fed's tapering resulted in shrinking asset values. Of course, the stock could also rise sharply if the Fed's bark was worse than its bite. One way or another, investors can expect a lot of volatility ahead.
