It's a rare opportunity to secure a reliable 15% dividend yield, but that appears to be the case with AGNC Investment Corp. (AGNC 0.97%) stock. On Feb. 9, the company paid a $0.12 dividend per share, the same rate it has been paying monthly for nearly four years.
Is this your chance to buy into one of the market's highest-paying dividend stocks?
High dividends make sense
It should come as no surprise that AGNC has paid an eye-popping dividend for years. In many ways, the entire business model is built around redistributing free cash flow directly to shareholders as efficiently as possible.
AGNC is not unique in its ability to consistently pay big dividends. Competitors like Rithm Capital operate essentially the same business model. In a nutshell, these businesses are referred to as mortgage REITs. By originating, owning, and servicing mortgage loans, companies like AGNC generate high levels of regular income. The REIT structure allows them to distribute this income to shareholders with minimal tax consequences -- a win-win for everybody.
High dividend payments make sense, but how exactly can the yield be as high as 15%? Debt is the simplest answer. AGNC, for example, finances much of its business through debt. It also issues both common and preferred stock so it can acquire more mortgage assets that generate cash to satisfy the sky-high dividend.
AGNC's entire business model is essentially rate arbitrage. The company finances its operations at one interest rate, hoping to deploy that capital into higher-rate investments. In this case, those assets are all related to the mortgage market. Because mortgages have been a remarkably stable investment over the decades, companies like AGNC believe they can deploy debt financing with less risk versus other asset classes.
Don't make this mistake
AGNC's business should generate double-digit dividend yields for the foreseeable future, but investors must understand exactly what they are buying into.
Over the past decade, AGNC's return on equity has gyrated wildly, with the long-term average hovering just above zero. Return on equity is a great metric to determine exactly how much wealth is being generated for shareholders. It is calculated after debt and preferred stock obligations are satisfied but before common stock dividends are paid.
If AGNC's return on equity has barely managed to stay above 0% on a long-term basis, how is it that shares have been able to pay a double-digit dividend the entire time? The answer is simple: by diluting shareholders. A decade ago, AGNC had around 320 million total shares outstanding. That figure has nearly doubled, reaching 620 million today. The share price has responded accordingly, falling 57% over that time period.
AGNC Price to Book Value data by YCharts.
While the Federal Reserve recently indicated that it would stop raising rates -- theoretically making mortgages more affordable, boosting the prospects for AGNC's portfolio -- there is also always the risk of another mortgage meltdown. Mortgage costs have skyrocketed for most Americans over just a handful of years. In 2021, mortgage payments accounted for 16.9% of the average American's income. Today, that figure is above 25%.
No one knows if or when the U.S. mortgage market will experience a bear market, but AGNC shares are not priced for the possibility. On a price-to-book basis, which measures how much the market is valuing the company's assets, AGNC shares trade almost at book value. That's a premium compared to its 10-year average.
Is AGNC's 15% dividend safe in 2024? The answer is likely yes, but that doesn't make this stock an attractive buy for long-term investors.
