AGNC Investment (AGNC 0.97%) is offering shareholders a nearly 14% dividend yield. That's a number that dividend investors should find both alluring and worrisome. Before you buy this ultra high-yield real estate investment trust (REIT), you need to understand what it does and why a key metric trending lower is a big problem.
A complex affair for AGNC
AGNC is a mortgage REIT. This is very different from most REITs, which own physical properties. Owning a building and renting it out to others is something that just about any investor can grasp with relative ease. Mortgage REITs invest in, as their name implies, mortgages and not physical properties. In the case of AGNC, it owns mortgages that have been pooled together into tradable securities often called something like a collateralized mortgage obligation (CMO).
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CMOs trade like bonds. The value of CMOs can be impacted by interest rate changes, housing market dynamics, consumer mortgage payment trends, and just plain old investor sentiment. On top of that, mortgage REITs generally make use of leverage in an effort to enhance returns. That leverage is often backed by the value of the CMO portfolio it owns. This increases the risk of a margin call if the value of the portfolio drops quickly for some reason (this was a problem during the Great Recession).
Mortgage REITs are very specialized investments that are not appropriate for all investors. In fact, conservative dividend investors are probably better off avoiding the niche. But if you need numbers to back that up, here are a few.
AGNC is falling, falling, falling
One of the key metrics to examine for a mortgage REIT is book value. For an industrial company that metric would basically be a proxy for the assets it owns, like manufacturing facilities. For a mortgage REIT, book value is, essentially, the value of its portfolio of mortgages. AGNC's book value per share stood at $9.41 at the end of the first quarter of 2023. That's not enough information to decide anything.
At the end of 2022, AGNC's book value was $9.84 per share. Basically, the company shrank $0.43 per share (about 4%) over that three-month span. Going back to the end of 2021 is even more alarming. At the end of that year, the book value per share was $15.75. The drop in 2022 was $5.91, a 37.5% decline.
In fairness, 2022 was a particularly bad year. But the trend has basically been going the same way for a long time. At the end of 2020, the book value per share was $16.71. At the end of 2019, it was $17.66. So between 2020 and the first quarter of 2023, AGNC's book value has fallen nearly 47%. That's a terrible trend, noting that an ever-smaller portfolio is unlikely to be able to provide the income needed to sustain the REIT's huge dividend.
In fairness, the dividend has been maintained at $0.12 per share per month since April 2020. But it has been cut four times since the company switched to monthly payments in 2014. At the end of 2014, the book value per share was $25.74. That's more than twice what it is today.
Look for other options
You can argue that the share count is a key figure in the book-value-per-share-math, which is true. But more shares without a corresponding increase in the value of the portfolio just dilutes current shareholders. So no matter how you cut it, a steady decline in the book value per share for AGNC is a problem for shareholders.
Add in the declining dividend and investors looking to live off of their dividend income would be better off finding a simpler investment (like a property-owning REIT) with a growing business and growing dividend. You'll probably have to accept a lower yield, but that will likely be a more attractive risk/reward balance over the long term.
