AGNC Investment (AGNC 0.14%), with a forward dividend yield of 14.3% as of this writing, is one of the market's highest-yielding stocks. It also pays monthly dividends.
That massive dividend might look tempting, but is it sustainable? Let's dig deeper into AGNC's business model to see if it's a high-yield trap or a viable income investment.
Image source: Getty Images.
AGNC isn't a traditional REIT
AGNC is a real estate investment trust (REIT). But unlike traditional REITs -- which buy properties, rent them out, and split the rental income with their investors -- AGNC doesn't buy any real estate. Instead, it's a mortgage REIT (mREIT) which originates its own mortgages and purchases mortgage-backed securities (MBS) to generate its interest income.
NASDAQ: AGNC
Key Data Points
Like traditional REITs, AGNC must pay out at least 90% of its pre-tax net income to maintain a favorable tax rate. But while traditional REITs usually measure their profits with their adjusted funds from operations (FFO), mREITs gauge their profitability through their net spread and dollar roll income per share.
The net spread refers to the yield earned on its mortgages and MBS minus the costs of funding that asset. It generates its dollar roll income by selling its to-be-announced (TBA) MBS for delivery in the current month as it simultaneously agrees to buy a similar MBS (the same issuer, term, or coupon) in a future month.
Rising interest rates usually boost both of these figures. But over the past year, AGNC's net spread and dollar roll income per share, along with its tangible net book value per share (which values its underlying assets), dipped as interest rates fell.
|
Metric |
Q4 2023 |
Q1 2024 |
Q2 2024 |
Q3 2024 |
Q4 2024 |
|---|---|---|---|---|---|
|
Net Spread and Dollar Roll Income per Share |
$0.60 |
$0.58 |
$0.53 |
$0.43 |
$0.37 |
|
Tangible Net Book Value per Share |
$8.70 |
$8.84 |
$8.40 |
$8.82 |
$8.41 |
Data source: AGNC.
For the full year, AGNC's net spread and dollar roll income dropped 28% to $1.88 per share as the Federal Reserve cut its benchmark interest rates three times. But that still comfortably covered its $1.44 in dividends per share.
But can it maintain that high yield as interest rates decline?
AGNC's business model might seem risky, but it allocates 89.4% of its $73.3 billion portfolio to Agency MBS assets, which are backed by Fannie Mae, Freddie Mac, or Ginnie Mae. That firm government support should shield it from a major mortgage crisis. Its riskier new TBA mortgages only account for 9.4% of its portfolio.
For 2025, analysts expect AGNC's net spread and dollar roll income to decline 15% to $1.60 per share as interest rates keep dropping. That will still cover its forward dividend of $1.44 per share, but investors might be wary of bigger rate cuts.
AGNC doesn't seem too concerned about that scenario. During its latest conference call, CEO Peter Federico said the company still had a "very positive outlook for Agency MBS" in 2025 as the Fed had "finally shifted its restrictive monetary policy stance and began the process of returning short term rates to a neutral level."
In other words, AGNC doesn't want interest rates to stay too high, since they'll chill the real estate market and make it harder to originate new mortgages, but they also don't want them to drop so low that they reduce its net spread income. Therefore, slower rate cuts -- which might now be a reality as U.S. President Donald Trump's unpredictable tariffs, geopolitical tensions, and sticky inflation generate headwinds for the economy -- could actually cushion the blow and enable AGNC to support its high dividend yield.
AGNC's 14.3% dividend looks sustainable... for now
AGNC's 14.3% yield might seem ridiculously high, but it should remain sustainable for the foreseeable future. It also looks undervalued: At $10 a share, it trades at just 6 times its projected net spread and dollar roll income per share for 2025.
That high yield and low valuation should limit its downside potential, but investors shouldn't just buy it and forget about it. Instead, they should closely monitor interest rates and see how they affect the mortgage market. If interest rates spike or drop too quickly, AGNC could lose its balance and be forced to slash its high dividends.
