AGNC Investment (AGNC 0.97%) has a massive 14.4% dividend yield. To put that into context, the average real estate investment trust (REIT) yields just 3.9%, using Vanguard Real Estate Index ETF (VNQ 0.05%) as a proxy. It's easy to see why a yield-hungry investor might want to learn more about AGNC. Fortunately, for most folks, the buy, sell, or hold call here will end up being pretty simple. But there's still a small group of investors that don't fit the common mold.
The problem with AGNC Investment
To get the big news out early, most investors won't want to buy or hold AGNC Investment. And if you own it, you'd probably be better off selling it. There are two major issues. The first is that the company is a mortgage REIT, which is far more complicated than a traditional property-owning REIT.
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You can pretty easily understand what a property-owning REIT does. It is exactly what you would do if you owned a rental property, but on a far larger scale. Investing in mortgage securities is an entirely different ball game, given that REITs like AGNC Investment generally own securities that have been created by pooling together individual mortgage loans. And such REITs often employ leverage, usually using their loan portfolio as collateral, to enhance returns. In some ways, a mortgage REIT is more like a mutual fund than a company. And they are certainly nothing like a landlord.
But you don't actually need to understand the details of mortgage REITs to see why you wouldn't want to own AGNC Investment. A simple graph will tell you all you need to know.
There's a lot going on in the chart above, so here's the breakdown. The blue line is the dividend, which indicates that the REIT has cut its payment multiple times over the past decade. The purple line is the stock price, which shows that the price has fallen along with the dividend. And the orange line is the dividend yield, which shows that, despite the terrible dividend track record and price performance, the yield has remained lofty over the entire decade.
If you bought AGNC Investment in the hope of living off of the income you collected from its dividend, you would have ended up with less income and capital losses. That would be the worst possible outcome for most dividend investors.
There's one category of buyers
What's interesting here is that AGNC Investment really isn't meant to be owned by the average dividend investor. It is a total return investment. Total return assumes the reinvestment of dividends. The chart below shows the stock return and the total return of AGNC Investment over the past decade. What a difference between the two!
Which brings up the question of who should own AGNC Investment. The answer is institutional investors focused on asset allocation. That list might include pension funds, endowments, and insurance companies. Such investors might want exposure to mortgage securities for diversification purposes, but aren't necessarily interested in the income generated, so reinvesting dividends isn't an issue.
To be fair, there are individual investors that will likely invest in the same way. But the ongoing price declines and dividend cuts will probably be harder for small investors to endure. Frankly, most individual investors likely won't fall into the asset allocation category anyway. And, if you do, it would probably be easier to just outsource the investment task to a mutual fund instead of trying to piece together a portfolio with companies like AGNC Investment.
AGNC isn't a bad REIT, but it isn't appropriate for most investors
To put it simply, AGNC Investment has a terrible dividend track record and that should keep most small investors from buying it. However, it isn't a bad REIT, just a specialized one that's appropriate for a very specific type of investor. Unless you are such an investor, you probably shouldn't buy it or hold it. And if you got lured in by the big yield, strongly consider selling it.
