When the Federal Reserve hiked its benchmark rates in 2022 and 2023, many income investors dumped their dividend stocks to buy risk-free CDs and T-bills with higher yields. However, the Fed reduced rates three times in 2024, recently executed its first rate cut of 2025, and has penciled in at least two more rate cuts by the end of the year.
As interest rates decline, CDs and T-bills will lose their luster as income investors pivot toward high-yield dividend stocks again. One of those stocks might be AGNC (AGNC +1.31%), which pays a whopping forward yield of 14.75% but still trades below Wall Street's top price target of $10.50 per share. Let's see if it's worth buying right now.
Image source: Getty Images.
AGNC is sensitive to interest rate swings
AGNC is a mortgage real estate investment trust (mREIT). Unlike traditional REITs, which purchase properties and rent them out to earn income, mREITs only originate their own mortgages and buy other mortgage-backed securities (MBS) to generate interest income.
That strategy might seem risky, but AGNC allocates 89.1% of its $82.3 billion portfolio to Agency MBS assets that are backed by Fannie Mae, Freddie Mac, or Ginnie Mae. That government support should protect it from another housing crisis or credit crunch.
Traditional REITs generally flourish when low interest rates make it cheaper to buy more properties. However, mREITs need interest rates to stay in a "Goldilocks zone" to generate consistent profits. If interest rates are too high, the market's demand for fresh mortgages dries up and AGNC gets stuck earning lower yields from its older MBS. If the rates are too low, it earns less interest income and its existing mortgages will be refinanced at lower rates.
NASDAQ: AGNC
Key Data Points
To generate cash for its future MBS purchases, AGNC constantly sells its own MBS to counterparty banks (with an agreement to buy those securities back at a set price plus interest at a future date). Those counterparties hold the MBS as collateral for the cash payment, while the interest from those securities still flows back to AGNC.
In this so-called "repo transaction," AGNC's profit or loss is pinned to the spread between the interest it pays to the counterparty for the loan and the yield it earns on its MBS. If the short-term rates are high, it needs to pay the counterparty higher interest payments -- but it might not earn enough interest from the MBS (which have longer-term maturity dates) to cover those payments. If the short-term rates are lower, it will have more breathing room between those two yields.
Why did AGNC's stock decline over the past year?
Based on those facts, the Fed's interest rate cuts should have boosted AGNC's profits. But its stock still dropped 6% over the past 12 months as the S&P 500 advanced 15%.
AGNC gauges its profit growth through its "net spread and dollar roll income" per share. The net spread is the profit it books from its aforementioned repo transactions, while its dollar roll income comes from buying TBA contracts (agreements to buy a pool of MBS at a future date) and selling them before the settlement date to buy additional TBA contracts. In these "rolling" transactions, AGNC constantly sells the contracts but never actually buys the underlying MBS.
The other way to measure AGNC's value is through its "tangible net book value per share," which divides the total value of its assets by its outstanding shares. In theory, lower interest rates should have boosted AGNC's net spread and dollar roll income while increasing its tangible net book value per share. But here's what happened over the past year:
|
Metric |
Q2 2024 |
Q3 2024 |
Q4 2024 |
Q1 2025 |
Q2 2025 |
|---|---|---|---|---|---|
|
Net spread and dollar roll income per share |
$0.53 |
$0.43 |
$0.37 |
$0.44 |
$0.38 |
|
Tangible net book value per share |
$8.40 |
$8.82 |
$8.41 |
$8.25 |
$7.81 |
Data source: AGNC.
Even though the Fed's rate cuts reduced its MBS yields, they didn't reduce the borrowing costs for its repo loans at the same rate. As a result, AGNC's profits fell as it continued to take out loans at higher rates to purchase lower-yielding MBS. Those rate cuts also drove more homeowners to refinance their mortgages at lower rates.
That's why analysts expect AGNC's earnings per share (EPS) to drop 15% to $1.59 in 2025 -- which should still easily cover its forward dividend rate of $1.44. For 2026, analysts expect its EPS to finally rise 2% to $1.62 as its interest rates stabilize. AGNC, like other REITs, must pay out at least 90% of its pre-tax income as dividends for a lower tax rate.
Should you buy AGNC's stock today?
Even if AGNC's stock rises to $10.50, it would still look cheap at 6.5 times next year's earnings. But if the Fed doesn't follow through on its rate cut plans, its interest rates could remain volatile and gobble up its profits. So while AGNC's stock might be bottoming out, I'd still avoid it and stick with traditional REITs with simpler business models.
