Income-minded investors won't find a much higher-paying option right now than AGNC Investment (AGNC +0.28%), with its dividend yield of almost 15%. That's a much higher yearly payout than the stock market's average annual gain.
However, stepping into this high-yielding stock simply because of its hefty dividend isn't necessarily the best move. There's more to the story. There's a lot more to the story, in fact.
But first things first.
What the heck is a mortgage REIT?
You're probably familiar with stocks of conventional companies. Owning a stake in Coca-Cola, for instance, means you share in the profits generated by the sales of some of the world's favorite beverages. A position in Apple reflects the revenue-bearing and profit-producing success of the iPhone and the company's other devices and services.
AGNC Investment isn't a conventional company, though. It's a real estate investment trust, or REIT. Most of these businersses are structured to hold rent-producing real estate like hotels, apartment complexes, or shopping malls. As long as 90% of a REIT's earnings are passed along to shareholders annually in the form of dividends, that income isn't first taxed at the corporate level (which would reduce its net bottom line).
Even by REIT standards, however, AGNC Investment is an unusual outfit. It doesn't own real estate. Rather, it owns bundles of mortgage loans made by government-run entities like Fannie Mae, Freddie Mac, and Ginnie Mae. These mortgages, of course, yield interest payments to their holders.
The twist? AGNC Investment uses borrowed money -- which also incurs interest expenses -- to purchase these bundles of mortgage loans.
That can be a bit of a head-scratcher. The REIT is paying interest to earn interest. The model usually works, however, because AGNC Investment borrows short-term funds at lower interest rates to finance purchases of longer-term mortgage loans that pay higher interest rates.
Except the model's been broken of late.
AGNC Investment on the defensive
Even if you only keep loose tabs on the market's condition, you've likely heard over the course of the past several months that the yield curve is inverted. That just means interest rates on short-term securities and bonds are higher than the interest rates on longer-term bonds and other debt -- a phenomenon sometimes seen when investors have doubts about the economy's near future, and anticipate stimulative rate cuts as a result. Such rate cuts tend to have a much greater impact on long-term bond prices, so investors gravitate toward relatively more stable short-term instruments during uncertain times.
And yes, such a shift can really mess things up for a mortgage REIT like AGNC Investment. In fact, it has messed things up for it. With its short-term borrowing costs creeping up while interest rates on its longer-term mortgage loan bundles are edging lower, AGNC Investment reported negative net interest income in each of its past four reported quarters. It's also now regularly reporting unrealized losses on the value of some of the mortgage-backed securities it's holding.
AGNC Cash from Operations (Quarterly) data by YCharts.
That hasn't prevented it from continuing to pay its dividend -- at least not yet. AGNC Investment has some cash and cash-like equivalents on its books, and it can sell securities as needed to come up with money to pay the dividend.
That's a less-than-ideal situation, though. No company wants to be forced to sell assets at terms other than of their choosing. (Price-wise, the REIT could be doing itself long-term harm by shedding securities that could be worth much more in the future.)
It's also a given that operating in the red is a problem even beyond the matter of supporting its dividend payments.
This is all why AGNC Investment has been such a disastrous performer since mid-2021, when economic cracks started to show and we first started seeing hints that the yield curve would eventually invert. The REIT's shares have lost roughly half their value over that timeframe.
NASDAQ: AGNC
Key Data Points
There's the rub for would-be investors, of course. The dividend is still being paid, but AGNC's unrealized losses are significant. Any investor who likes the option of being able to liquidate a dividend-paying position with at least most of the initial position intact would struggle to stomach such a setback.
Then there's the other ugly reality: While the company is still paying its dividend, something has got to give sooner or later. If the yield curve remains inverted for a while, the maintaining the dividend may prove untenable.
Not the right dividend-paying stock for everyone
But maybe the global economy will experience a soft landing that un-inverts the yield curve. That would certainly work in the REIT's favor. And for the record, interest rates are moving in that direction after the fourth quarter's preliminary gross domestic product annual growth rate came in at 3.3%, which easily exceeded expectations of 2%. Never say never.
Still, this isn't palatable volatility for faint-of-heart income investors... even with the enormous dividend yield that has resulted from it. Mortgage REITs like AGNC Investment that rely heavily on borrowing leverage are highly sensitive to even the slightest degree of turbulence in interest rates and credit markets. Full-blown economic weakness can be near-catastrophic to them.
In other words, if safety is a concern, look elsewhere. You may not find another stock yielding as much as this one does. However, you can find above-average yields attached to stocks that are much less volatile and risky. Being able to sleep at night counts for something, too.
