Not all real estate investment trusts (REITs) are the same, a fact that's particularly important to remember when you venture into the mortgage REIT sector. Indeed, when investors see AGNC Investment's (AGNC -1.28%) huge 14% dividend yield, they need to consider a lot more than just the big dividend checks. Here's why AGNC's yield is so high and why conservative dividend investors may not want to buy it.
Properties versus mortgages
When most people think of a REIT, they probably conjure up a physical property, like an apartment building, strip mall, or office building. In general, owning such assets is a pretty stable business as the landlord gets to collect regular rent checks. The income generated is passed on to investors via well-supported dividends. There are a lot of well-run REITs with incredible dividend histories out there, including Federal Realty Investment Trust (FRT -0.99%), which has increased its dividend annually for more than five decades! (That's the longest streak in the REIT sector.)
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AGNC Investment, however, doesn't own physical properties. It owns mortgages. That's very different, particularly because a lot of what the company owns are actually collateralized mortgage obligation, or CMOs. CMOs are collections of mortgages that have been put together into something that resembles a bond. The CMOs can be traded, and so their values tend to fluctuate more than the price of a physical property might. And then there's the issue of interest rates, which also change the value that the market will assign to a CMO. Thus, there's more risk in AGNC's business model, in general, than you would likely be exposed to if you owned strip mall landlord, and Dividend King, Federal Realty.
On top of that, mortgage REITs often use leverage to enhance returns. Generally speaking, the collateral for the loans mortgage REITs take on is their CMO portfolios. So, if there's a drastic change in the value of the portfolio, mortgage REITs can face lender calls for more capital. Just like an individual investor facing a margin call, if the REIT can't come up with the needed capital, it could be forced to sell assets from its portfolio.
So there's just more overall risk involved in owning a mortgage REIT like AGNC. Investors want to be rewarded for that extra risk, and it shows up via a higher dividend yield.
The proof is in the pudding
Risk can show up in many ways, but one of the most notable for AGNC has been in its dividend. The quarterly payment was cut in 2012 and again in 2013. In late 2014, the payment schedule was switched from quarterly to monthly, with dividend cuts following in 2015, 2016, 2019, and 2020. The monthly dividend has remained at $0.12 per share since April 2020. If you are looking for a consistent dividend payer, this is not a good option for you.
What's interesting is that the dividend yield has been roughly 8% or higher for most of the REIT's history. Dividend yields and stock prices go in opposite directions, so for the yield to remain as high as it has after a dividend cut, the stock price has to fall. And that is exactly what has happened, with the stock tracking the dividend payment lower over time.
Anyone trying to live off the dividends their portfolios generate will likely be disappointed with this investment. Every time the dividend is cut, you get a double whammy in the form of a falling stock price.
Risk versus reward
The easy answer to the question of why AGNC Investment's yield is so high is that the risk is so high. If you are looking to maximize the income your portfolio generates, there are much better options available, though you may have to accept a lower yield. In the end, though, that lower yield will probably end up being much more durable than a high yield that can't be supported.
