AGNC (AGNC 1.55%), with a forward dividend yield of 13.4%, is one of the highest-yielding stocks on the market. The bears claim that yield is unsustainable, but the bulls believe it can easily support that payout over the long term.
Over the past year, the bulls remained in charge as AGNC's stock rose 14% and delivered a total return of 33%, including reinvested dividends. The S&P 500 rallied 16% during that period but only delivered a total return of 17%. Let's examine why AGNC outperformed the market and whether it can sustain that momentum over the next year.
Image source: Getty Images.
Understanding AGNC's business model
AGNC is a mortgage real estate investment trust (mREIT). Unlike equity REITs -- which buy properties, rent them out, and split the rental income with their investors -- mREITs don't own any physical properties. Instead, they only purchase mortgages and mortgage-backed securities (MBS) to collect the interest payments. Yet like other REITs, mREITs must pay out at least 90% of their taxable income as dividends to maintain a lower tax rate.
It might seem risky to own an entire portfolio of mortgages and MBS. To mititgate that risk, AGNC allocates 84% of its $90.8 billion investment portfolio to Agency MBS assets, which are backed by Fannie Mae, Freddie Mac, or Ginnie Mae. That government support should shield it from another housing crisis.
Equity REITs typically thrive when low interest rates make it more affordable to acquire new properties. However, mREITs need interest rates to stay in a "Goldilocks zone" to stay profitabale. If interest rates are too high, the market's demand for fresh mortgages cools off as it earns lower interest from its older MBS. If interest rates are too low, it earns less interest from its mortgages -- and its existing mortgages will be refinanced at lower rates.
NASDAQ: AGNC
Key Data Points
To generate more cash for its future MBS purchases, AGNC sells its own MBS to counterparties and agrees to repurchase them at a set price plus interest on a future date. Those counterparties hold the MBS as collateral, but the accumulated interest still flows back to AGNC. It refers to these sales as "repo transactions".
If short-term interest rates are too high, AGNC must pay its counterparties higher interest -- but it might not earn enough interest from its long-term MBS to cover those payments. In other words, the Fed's short-term rates must remain lower than its long-term rates for AGNC to generate consistent profits. So when the yield curve inverted (short-term yields temporarily exceeded long-term yields) from 2022 to 2024, AGNC's profits declined.
What happened to AGNC over the past year?
The Fed cut its benchmark rates three times in both 2024 and 2025, and the yield curve normalized in the second half of 2024. Those developments are favorable for AGNC and other mREITs; however, two of its core profitability metrics -- its "net spread and dollar roll income per share" and its "tangible net book value per share" -- remained unstable over the past year.
|
Metric |
Q3 2024 |
Q4 2024 |
Q1 2025 |
Q2 2025 |
Q3 2025 |
|---|---|---|---|---|---|
|
Net Spread and Dollar Roll Income per Share |
$0.43 |
$0.37 |
$0.44 |
$0.38 |
$0.35 |
|
Tangible Net Book Value per Share |
$8.82 |
$8.41 |
$8.25 |
$7.81 |
$8.28 |
Data source: AGNC.
AGNC's "net spread" refers to the profit it books from its repo transactions. Its "dollar roll" income comes from buying TBA (to be announced) contracts -- or agreements to buy more MBS at future dates -- and selling them before the settlement to buy another TBA contract. By "rolling" those contracts forward, it books profits from the spreads but never buys the MBS.
Its "tangible net book value per share" is calculated by dividing the total value of its assets by the number of outstanding shares. In theory, the Fed's rate cuts should have boosted AGNC's net spread and dollar roll income, as well as its tangible net book value per share.
However, the rate cuts didn't reduce its MBS yields and borrowing costs for its repo loans at the same rate. As a result, AGNC still took out loans at higher rates to buy lower-yielding MBS. The rate cuts exacerbated that pressure by driving more homeowners to refinance at lower rates. Simply put, it could take a few quarters for AGNC to secure loans at lower rates to buy higher-yielding MBS again. When that happens, its earnings should stabilize.
Can AGNC cover its massive dividends?
For 2025, analysts expect AGNC's earnings per share (EPS) to decline 19% to $1.53. Yet that should still easily cover its forward dividend rate of $1.44 per share. For 2026, they expect its EPS to grow 4% to $1.58 as its profit spreads normalize.
AGNC's rally over the past year indicates investors are already looking toward that stabilization instead of dwelling on its choppy growth throughout 2025. Yet at $11, its stock still looks dirt cheap at seven times next year's earnings.
AGNC's stock probably won't skyrocket over the next 12 months, but its high yield and low valuation will limit its downside potential. It should at least keep pace with the S&P 500 and reward its patient investors with high dividends as interest rates stabilize.
