AGNC Investment: High Yields With Serious Risks
AGNC Investment (NASDAQ: AGNC) is a real estate investment trust (REIT) focused on residential mortgage-backed securities. While proponents praise its impressive forward yield of 15%, critics caution that it may be a high-yield trap, offering little growth for dividend investors. Let’s take a closer look at AGNC’s business strategy and assess whether to buy, sell, or hold its stock.
Understanding AGNC’s Business Model
Unlike traditional REITs that buy and rent properties, AGNC operates as a mortgage REIT (mREIT). It generates income by offering its own mortgages or purchasing mortgage-backed securities (MBS), rather than engaging in property rental.
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To maintain favorable tax treatment, mREITs like AGNC must distribute at least 90% of their taxable earnings as dividends. This requirement can present challenges, as mREITs face various risks including interest rate fluctuations and credit risks. When interest rates are low, income diminishes as borrowers refinance at better rates. Conversely, high interest rates can reduce the demand for mortgages, hindering growth potential. This creates a dual-edged sword for mREITs, making them often riskier and more volatile than traditional REITs, despite their higher yields.
Reasons to Consider Investing in AGNC
AGNC focuses more than 98% of its portfolio on agency MBS associated with Fannie Mae, Freddie Mac, or Ginnie Mae. These government-sponsored entities are designed to alleviate credit risk, assuring investors that they are less likely to face defaults. AGNC retains a tiny portion of its portfolio for non-agency investments, providing flexibility during market shifts.
Additionally, AGNC maintains a unique arrangement with Bethesda Securities, allowing it to access lower funding rates due to its captive broker-dealer status. It is noteworthy that AGNC offers monthly dividends and operates with a trailing payout ratio below 100%. With a price-to-book ratio of 1.1, AGNC appears to be relatively inexpensive.
Reasons to Be Cautious About AGNC
Critics argue that AGNC’s significant dividend payouts come at the cost of underperformance when compared to the broader market. Over the last decade, AGNC’s stock has plummeted by 58%. In response to market conditions during the pandemic, AGNC slashed its dividend by 25% in 2020, which it has not yet restored after four years.
For investors who would have reinvested dividends, AGNC achieved a total return of 38% over the past ten years. However, this is minimal compared to the S&P 500’s remarkable total return of 245% in the same period. For further comparison, Realty Income, another major player in the retail REIT space, not only advanced by 27% but also achieved a total return of 101%, consistently increasing its dividends throughout the pandemic. Thus, AGNC’s performance lags behind both the market and traditional REITs.
Is Now the Time for AGNC?
While AGNC offers a high yield and appears cheap, its vulnerability to credit and interest rate risks limits its attractiveness compared to other REIT options. For now, it may be prudent to sell or avoid AGNC and consider more stable retail REITs like Realty Income.
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*Stock Advisor returns as of November 18, 2024
Leo Sun has positions in Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Nasdaq, Inc.
