It can be hard to look at a stock with a huge yield and not be drawn in. That's exactly the case today with AGNC Investment (AGNC 0.76%) and its ultra-high 14.8% dividend yield. And given that AGNC Investment is a real estate investment trust (REIT), a cursory look might even give the impression that the dividend is backed by stable real estate investments. You need to look deeper to understand the inherent risks of owning AGNC Investment.
What does AGNC Investment Do?
Real estate investment trusts were created as a way for small investors to have access to cash-generating, institutional-level real estate. The logic backing the REIT structure is roughly similar to you buying a second home and renting it out. It's just that REITs buy large physical properties, like apartment buildings, hotels, and offices, and lease them out. It isn't a complex business at its core and dividend investors should probably consider owning some REITs.
Image source: Getty Images.
But all REITs are not the same. They will invest in different property types and consider varying risk profiles for the actual assets they end up adding to their portfolios. Some make more aggressive use of leverage, too. You need to dig into the actual business of the REITs you are looking at.
And then there are mortgage REITs like AGNC Investment.
Mortgage REITs do not own properties; they own mortgages. Typically, these mortgages have been bundled together into a single security that functions much like a bond, throwing off interest. Although mortgages are related to real estate, they are not the same thing as buying a physical property.
For example, the price of a mortgage security can be affected by a large number of factors, including interest rate changes, delinquency rates, mortgage repayment trends, and even broader housing market dynamics. And since mortgage securities trade on the open market like other debt instruments, the value of the securities changes on a daily basis. The use of leverage by REITs like AGNC Investment can exacerbate volatility as well, since a REIT's mortgage securities portfolio is often used as collateral for the loans.
All told, mortgage REITs are very complex businesses. You really need to do your homework to understand the sector and the specific company you are considering before you buy here.
AGNC is not a consistent dividend performer
If the extra effort needed to understand the mortgage REIT sector isn't enough to dissuade you from buying AGNC, there's more. If you are considering high-yield dividend stocks, you probably hope to live off of the income your portfolio generates either today or at some point in the future. That means that dividend consistency is likely very important to you. As the graph below shows, AGNC Investment's quarterly dividend has been anything but reliable.
AGNC Dividend data by YCharts
However, there's more to the story here. The next chart adds the stock price and dividend yield to the above dividend history. The first thing to notice is how the stock price (the purple line) has roughly tracked the dividend (the orange line) lower over time. That makes sense, since investors don't usually like dividend cuts.
But the really interesting line is the blue line, which is the dividend yield. Notice that the yield has always been high, usually more than 10%. That's the basic math of dividend yields, of course, but it shows that AGNC Investment is pretty much always offering an unusually attractive yield. Investors that have been tempted to buy that high yield, meanwhile, have historically ended up with declining dividend income and capital losses from a falling share price.
This time could be different, but is it worth the risk?
In fairness, the future performance of AGNC Investment and its dividend could be different from the past. As the old saw goes, past performance is no guarantee of future results. But in this case, particularly if you are trying to live off of the income your portfolio generates, it just isn't worth the risk of buying AGNC Investment and its ultra-high yield. The legwork required to understand and track the mortgage REIT has yet to be rewarded with the type of dividend and stock results that justify the effort.
