The first thing I ask about when I'm looking at a stock is, "What's the dividend look like?" There's a host of reasons for this, and the question spans beyond the dividend yield, which is just one aspect of a dividend. But after more decades than I care to admit of dividend investing, even I can't help seeing a huge dividend yield and getting a little bit excited.
But I've learned to step back from the irrational desire to "get rich quick" and look beyond the yield. That's important when it comes to AGNC Investment (AGNC 0.97%) and its gigantic 15.1% yield today.
One name: Worldcom
When I was younger, less mature, and still believed I could take on the world, I bought a company with a 25% dividend yield. It was called Worldcom, and it no longer exists because it went bankrupt -- while I still owned it, if I recall correctly. I wasn't a novice investor at that point, I was one driven by an overinflated belief in my own ability (which is actually worse). I lost my entire investment in Worldcom.
Image source: Getty Images.
The problem wasn't that I didn't know there were risks in owning the stock. My problem was that I ignored the risks, instead focusing on other factors that I thought were more important. There was an accounting scandal in the mix that I couldn't have known about, but that wasn't the only problem with buying an over-leveraged telecom company focused on the dying long-distance business. At one point I reasoned that, at 25%, all I needed was one year of dividends and the stock would have paid for itself. Yes, I'm almost ashamed to admit, that thought actually went through my mind. As noted, the stock didn't pay for itself because the dividend was soon eliminated and the company went belly up. Oops?
To this day my spouse chides me because, with little to no interest in investing, she actually told me not to buy it. Of course I didn't listen! The only positive thing here is that I have long focused on diversification, putting only a certain dollar amount in each investment I make. So the pain was extreme on the emotional front, but fairly limited on the financial front. However, this little story helps explain why, when I see a huge yield like the one from AGNC Investment, the first thing that crosses my mind is "Worldcom." Learn from my hard-earned lesson and view ultra-high yields with a bit of extra skepticism.
So what about AGNC?
AGNC Investment is what is called a mortgage real estate investment trust (REIT). It doesn't buy physical real estate, it buys mortgage securities that are pooled into bond-like assets, often called something like a collateralized mortgage obligation. Most investors can easily wrap their heads around buying a property and renting it out, like a property-owning REIT would do. Mortgage REITs are way more complex, more akin to running a mutual fund.
Some of the factors that can dramatically impact mortgage prices include investor sentiment, interest rates, housing market dynamics, mortgage repayment trends, and mortgage refinancing activity, among other things. There are a lot of moving parts. You need to do your homework before delving into this niche REIT sector. And on top of this, mortgage REITs generally make use of leverage in an attempt to enhance returns, which also leverages the risks. Conservative investors should probably avoid AGNC Investment and all other mortgage REITs.
That said, the graph above really sends the message home. Notice that the blue line, the dividend yield, has always been pretty high, often above 10%. But the purple and orange lines, which are stock price and dividends, respectively, both head steadily lower for over a decade. Income investors have always had an opportunity to buy a high yield here -- and if they did that over the past decade or so, they ended up with less dividend income and a capital loss. That's about the worst possible outcome for an investor trying to live off of their dividends.
Things could change, but is that worth the risk?
The situation around AGNC Investment could change and the dividend could rise instead of fall. But the history here suggests that most income investors will want to stay away, because the dividend isn't reliable. And if you can't count on that dividend, you really can't count on this stock. In the end, I wouldn't touch AGNC Investment with a 10-foot pole, and I don't think any conservative dividend investors should either. A lower yield from a less complex company with a better dividend history, perhaps Realty Income (O -0.17%), would be a much better option.
