Shares of AGNC Investment (AGNC -1.01%) have fallen more than 10% from their peak earlier this year. The stock currently trades at less than $10 per share. That slump has driven up its dividend yield to more than 15%, which is over 10 times higher than the S&P 500's (^GSPC -1.13%) dividend yield (less than 1.5%).
Here's a look at whether shares of the high-yielding real estate investment trust (REIT) are worth buying below $10.
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What has weighed on the stock?
This year, volatility has been the primary factor weighing AGNC Investment's stock price. CEO Peter Federico discussed this issue on the mortgage REIT's first-quarter earnings conference call. He noted that the tariff policy announcement in early April "caused volatility to increase significantly across all financial markets." That included a substantial increase in interest rate volatility.
The CEO commented: "This interest rate volatility and broad macroeconomic uncertainty caused normal financial market correlations to break down, liquidity to become constrained, and investor sentiment to turn negative. The agency MBS market was not immune to these adverse conditions, and also came under significant pressure in early April."
The increase in volatility negatively impacted the value of the company's portfolio. That caused the company's cost of capital to rise from 16.7% in the first quarter to nearly 18% early in the second quarter. That's noteworthy because the REIT needs to earn an investment return above its cost of capital to cover its dividend payments.
A compelling return opportunity right now
While AGNC's portfolio value declined and its cost of capital increased this year, the company also saw some positives. In the company's first-quarter earnings press release, Federico remarked that "our anticipated portfolio returns have increased commensurately with today's wider spread environment." He further commented, "At current valuation levels, we believe Agency MBS offers investors a compelling return opportunity on both a levered and unlevered basis."
Federico ran through the returns math on the accompanying conference call. The CEO highlighted that a portfolio levered the way AGNC levers its portfolio can generate a return in the low-20% range in the current market environment. That easily covers its now-higher cost of capital and, therefore, its high-yielding dividend. Because its "go-forward returns still align very well with that total cost of capital" right now, according to the CEO, the dividend is safe.
The risk of getting out of alignment
As long as AGNC's returns align with its total cost of capital, the REIT can continue to pay its current monthly dividend rate. However, if its returns fall below its cost of capital, the REIT might need to reduce its dividend. It has already had to do that several times in the past:
AGNC Dividend data by YCharts
That's a risk that investors in the mortgage REIT would need to constantly monitor because market conditions can change sharply and without warning. That was the case earlier this year, as the unexpectedly high initial tariff rates spooked the market, which caused significant volatility in interest rates.
This time, returns increased. However, that won't always be the case. If there's a significant shock to the credit markets, like what happened during the pandemic and financial crisis, the company's returns might not align with its cost of capital, which could cause it to cut its dividend.
A high-risk, high-reward income stock
AGNC Investment has a higher-risk business model. Because of that, there is a higher risk that the REIT might need to reduce its dividend in the future if market conditions experience an abrupt turn.
Given that, the dip below $10 a share doesn't necessarily make the REIT a screaming buy for those seeking a big-time income stream. It provides more risk-tolerant investors with the opportunity to earn a high reward in the form of its currently high-yielding monthly payout. However, it's not a good buy for those more risk-averse, since it doesn't provide the most bankable income stream.
