AGNC Investment (AGNC +1.31%) does something that most investors can't: It invests in mortgages. If you are looking to add the mortgage asset class into your portfolio, perhaps because you use an asset allocation strategy, it could be a good fit. Just go in understanding why AGNC Investment is worth buying and why it won't be right for every investor.
Three reasons to buy AGNC Investment
Most investors will likely focus on AGNC Investment's massive 15%-plus dividend yield. That's not actually a reason to buy the stock. The reason why will be discussed more. Right now, the goal is to show why buying AGNC Investment now is a good idea, and the first reason is not the yield -- it is the business model.
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Most real estate investment trusts (REITs) buy physical properties and lease them out to tenants. That's something you could do on your own, though on a much smaller scale.
AGNC Investment buys mortgages that have been pooled together into bond-like securities. It owns a massive portfolio of such securities that most small investors couldn't hope to replicate. In other words, AGNC Investment is providing access to an asset class that would largely be out of reach of most investors.
The second reason to like AGNC Investment is the complexity of the mortgage securities market. Not only would it be hard for you to invest in similar securities, but you'd have to have a huge amount of expertise to do so. Everything from interest rates to housing market dynamics to mortgage repayment rates impacts the value of mortgage securities. Once again, AGNC Investment is providing a service that would be hard for you to replicate on your own.
NASDAQ: AGNC
Key Data Points
That said, the biggest reason to allow AGNC Investment to handle your hard-earned cash is that it has actually provided fairly solid total returns over time. As the chart highlights, AGNC Investment's total return has been roughly similar to that of the S&P 500 (^GSPC +0.84%) since AGNC Investment's IPO. And, over some stretches, it vastly outperformed the S&P 500, providing important diversification for portfolios built around an asset allocation model.
AGNC Total Return Price data by YCharts
AGNC Investment's dividend problem
So, if you are using a diversified asset allocation model and are focused on total return, there are some good reasons to buy AGNC Investment like there's no tomorrow. Unfortunately, a lot of investors who are looking at AGNC Investment are doing so because of the huge dividend yield.
The mortgage REIT, however, is pretty clear that a sustainable dividend and high yield aren't the main focus. On its investor relations home page, the company states that its objective is "favorable long-term stockholder returns with a substantial yield component." The dividend is a part of total return, but total return assumes that the dividend will be reinvested.
As the chart highlights, after a quick rise in the dividend and stock price, both the dividend and stock price have been on a steady decline. The yield is so high that total return has still been strongly positive. But if you spend those dividends on living expenses, you would have less income and less capital. That's not what most dividend investors are likely to be looking for in a dividend stock.
There are reasons to like AGNC, and also reasons to avoid it
AGNC Investment is complex. If you buy it just because it has a huge dividend yield, you are likely to end up disappointed with your purchase. Three far better reasons to buy it are the difficulty of investing in mortgage securities, the complexity of trying to understand that market, and the attractive total returns management has produced over the long term.
If you are an asset allocation-focused investor, it can have an important place in your portfolio. If you are looking to live off of the income your portfolio generates, however, AGNC Investment's goals probably aren't going to align with your goals, and that could leave you feeling shortchanged in the end.
