There are sayings like, "It is always darkest before the dawn" and "Every cloud has a silver lining." Translating those to Wall Street would suggest that buying when things are bleak is a good idea. Sometimes that's true, but at other times it isn't. If you think now is a good time to buy downtrodden AGNC Investment (AGNC 0.97%) because you expect a market upturn in the near future, here's why you might want to think again.
Yield and price go in opposite directions
AGNC's single biggest attraction for most individual dividend investors will be its massive 20% dividend yield. That's not a typo, but a yield that high has to be taken with a grain of salt. In many cases, such elevated yields are an indication of high risk. In this case, that risk is a broad concern over the sustainability of the dividend.
Image source: Getty Images.
Basically, as a stock's price goes down, the dividend yield goes up. Yield is, after all, a simple math equation: Annual dividend divided by share price. With AGNC's share price down more than 40% from its 52-week high, the yield has been pushed dramatically higher.
There's a lot going on with AGNC today. As a mortgage real estate investment trust (REIT), it faces headwinds from rising interest rates and a turbulent housing market, among other things. So it isn't surprising that investors are in a dour mood. In fact, the entire REIT sector is out of favor right now. But there's a key metric for mortgage REITs that is very telling: book value per share.
For a mortgage REIT, book value is basically the value of its portfolio of mortgage investments. Since that is essentially all the company owns, book value is a very clear indication of what investors are buying. In the third quarter, AGNC's book value was $8.08 per share. That is down from $9.39 at the end of the second quarter and $9.08 in Q3 2022.
That's a very big drop on both fronts and indicates that AGNC's core business is under severe stress, no matter how much the company attempts to accentuate the positives. Even if there's a bull market and AGNC's business starts to improve, it may not be enough to make the dividend safe from a cut.
AGNC has a really bad dividend track record
There's good reason to be worried about the dividend, and that goes beyond the strains the business is under today. A quick look back at the company's dividend history shows just how much potential risk there is. As the orange line of the chart below shows, the dividend has been in a steady downtrend for a decade.
But take note of the purple line, which has been heading lower along with the dividend. That's the share price. Go back to the math of dividend yield, and you can see how AGNC's dividend yield (the blue line) has continued to remain in the double digits even as the dividend has steadily shrunk. This is not a good income story for investors who are trying to create a passive income stream to live on in retirement.
Sure, things could get better. The dividend could be sustained and even shift back toward growth. But given the history and the steep drop in book value, the risk/reward balance here seems tiled way too far toward risk for most investors.
There's a place for AGNC, but probably not in your portfolio
Mortgage REITs like AGNC are complex investments that most investors should probably avoid. The history here highlights that it just isn't a reliable dividend stock. It is most appropriate for institutional-level investors, like insurance companies, that are focused more on things like asset allocation, as it provides direct exposure to mortgages.
Most individual investors seeking out dividend income don't operate like institutional investors. Even if there's a bull market on the horizon, you will likely be better off staying away from AGNC Investment.
