Where Will AGNC Stock Be in 1 Year?

AGNC Investment (AGNC -0.38%), a mortgage real estate investment trust (mREIT), pays a whopping forward dividend yield of 15.7%. It makes those payments on a monthly basis.

That might make AGNC seem like a great income-generating alternative to the 10-year Treasury, which only pays a 4.5% yield, or other dividend stocks. But over the past 12 months, AGNC's stock declined 12%. With reinvested dividends, that produced a total return of less than 3%.

Image source: Getty Images.

Should investors accumulate this high-yielding stock as the bulls look the other way? Let's review its business model, near-term challenges, and valuations to decide.

How does AGNC make money?

AGNC isn't like a typical REIT like Realty Income (NYSE: O) which buys up a lot of properties and rents them out. Instead, it's an mREIT that only originates its own mortgages and buys other mortgage-backed securities (MBSes) instead of physical real estate. It books its interest from those investments as its net profits. But like traditional REITs, mREITs still need to pay out at least 90% of their taxable income as dividends to maintain a lower tax rate.

It might seem risky to go all-in on mortgages, but AGNC allocates 89.2% of its $78.9 billion portfolio to agency MBS assets that are backed by Fannie Mae, Freddie Mac, or Ginnie Mae. That government support should shield it from another housing crisis or credit crunch.

What happened to AGNC over the past year?

Unlike other REITs, which gauge their profitability with their funds from operations (FFO), mREITs report their profits as "net spread and dollar roll income" per share. The net spread is the yield an mREIT earns on its investments minus the costs of funding those assets. It generates its dollar roll income by selling an MBS for the current month while agreeing to a buy it back at a future date. It aims to buy that MBS back at a lower price to book a profit.

The other way to measure an mREIT's value is through its tangible net book value per share, which divides the total value of its assets by its number of outstanding shares. Ideally, AGNC's net spread and dollar roll income should be rising along with its tangible net book value. But over the past year, both metrics declined:

Data source: AGNC.

AGNC's profitability usually improves when interest rates decline, because low rates generally reduce its borrowing costs (which are pinned to Treasury yields) for purchasing more MBSes. But over the past year, AGNC's profits and book value still declined even as the Federal Reserve reduced those benchmark rates.

That happened because even though the Fed's rate cuts reduced MBS yields, they didn't reduce the borrowing costs for funding those MBS purchases as rapidly. As a result, it needed to take out its loans at higher rates to buy lower-yielding MBSes -- and that pressure reduced its profits. To make matters worse, declining interest rates drove more homeowners to refinance their mortgages at lower rates, which reduced the profitability of its own originated mortgages.

What will happen to AGNC over the next year?

As that pressure persists, analysts expect AGNC's net spread and dollar roll income per share to drop 12% to $1.66 in 2025, then dip another 2% to $1.63 in 2026. That still easily covers its forward annual dividend rate of $1.44 per share, but its shares could remain under pressure if its MBS yields don't catch up to the Treasury yields and stabilize its profits. That pressure could reduce its book value, drive its shares lower, and offset the gains from its big dividends.

If AGNC matches analysts' estimates and still trades at 5 times its forward net spread and dollar roll income per share, its stock price could dip to about $8 by the beginning of 2026. Therefore, AGNC's stock could stay flat or drop slightly lower over the next 12 months -- but its downside potential is limited and its generous monthly dividend looks sustainable. Those strengths might make it a viable investment for income investors, but it certainly won't blast off over the next year.