It is very easy for dividend investors to get drawn in by an ultra-high dividend yield, like the 15% yield on offer from AGNC Investment (AGNC 0.97%). More often than not, however, focusing too heavily on yield ends up being a mistake. The past 10 years shows that very clearly with this unique real estate investment trust (REIT). Here's a look at what happened, and why shareholders have been painfully let down.
AGNC has been falling, falling, and falling
If you had purchased $1,000 worth of AGNC stock a decade ago, it would be worth just over $413 today. That's brutal, particularly when you compare that result to that of the average REIT, using Vanguard Real Estate ETF (VNQ 0.05%) as a proxy, which would have turned $1,000 into a bit more than $1,132. Okay, that's not exactly great either, but it is way better than the deep losses investors would have suffered with AGNC.
And yet you can't simply look at stock price change when evaluating real estate investment trusts. The REIT business structure is specifically designed to pass income on to investors so they can benefit from the cash flows generated by institutional-level real estate investments. As noted, AGNC has a huge 15% yield. The average REIT has a yield of around 4.5%.
AGNC Dividend Yield data by YCharts
As the chart above shows, these yields aren't flukes, and the wide difference between the two has been fairly consistent over time. That has to do with AGNC being a mortgage REIT, a sub-sector of the REIT space that generally comes with exceptionally high dividend yields. Mortgage REITs buy mortgages that have been packaged into debt securities, often called something like a collateralized mortgage obligation. They are more like a mutual fund than a traditional REIT, which would buy physical assets. To better compare the performance of AGNC and the average REIT, you really need to examine total return, which assumes dividend reinvestment.
AGNC Total Return Level data by YCharts
When you add in the dividend, AGNC looks a lot better, turning $1,000 into roughly $1,310. But it still lags behind the average REIT, which turned the same initial investment into $1,672. So AGNC's big dividend was important in that it kept the stock from being a huge loss for investors, but it wasn't enough for it to keep pace with the average REIT.
The big problem for AGNC investors
If you dig into the numbers for AGNC just a little bit more, however, you start to see the real problem with the stock. Dividend yield is a simple math equation that divides the annualized dividend by the stock price. Normally, the key big takeaway here is that stock price and yield go in opposite directions, assuming the annualized dividend remains constant. But what happens if the annualized dividend changes?
AGNC Dividend Yield data by YCharts
The graph above shows clearly that AGNC's dividend has been declining for a decade. And yet the yield has remained elevated for the entire span, often sitting above 10%. Given the math equation for dividend yield, the only way that can happen is if the stock price continues to decline along with the dividend payment. Which the chart below shows is what has taken place.
AGNC has been a pretty ugly story on the total return front. However, investors who thought they were buying a big dividend payment ended up with a string of dividend cuts on top of material stock declines. This is an extreme example of why dividend yield alone does not provide enough information to make an investment decision.
Know what you are buying
As a mortgage REIT, AGNC is a very specific, and fairly complicated, type of investment that is not appropriate for most investors. Institutional investors like pension funds might find it useful as a way to diversify their assets. But those looking for a reliable income stream should clearly not be buying it given the dividend history. Indeed, not even a huge yield can make up for a steadily falling dividend and stock price.
