AGNC Sports a Gigantic 15% Yield. Are Investors Paying Too Much for It?

AGNC Investment (NASDAQ: AGNC) is a very complex business, but its 15% dividend yield is like a siren's song to dividend investors traveling along Wall Street. There are a lot of good reasons why income-focused investors should avoid AGNC, and the mortgage real estate investment trust (REIT) added a new one when it reported third-quarter earnings. Here's what you need to know before buying AGNC.

AGNC Investment is a complex REIT

A property-owning REIT buys a building, like an apartment or warehouse, and leases it out to generate rental income. That's fairly easy to understand because it's exactly what you would do if you had a rental property. The only difference is the scale of the asset, with REITs owning institutional-level properties.

The whole point of a REIT is that it gives smaller investors access to such cash-producing assets, which would normally be outside of their investment capacity.

Image source: Getty Images.

AGNC isn't a property-owning REIT; it is a mortgage REIT. It buys mortgages that have been pooled into bond-like securities. In some ways, it is more like a mortgage-focused mutual fund that just happens to trade as a company. Mortgage bonds can be very hard to track for small investors.

Factors that affect the price of such securities include interest rates, housing market dynamics, mortgage repayment rates, and even the year of creation of the mortgage bond (sometimes called the vintage). As a shareholder, it is highly unlikely that you will be able to keep tabs on AGNC's portfolio.

There's another wrinkle here. AGNC Investment isn't really an income stock; it is a total return investment. Just look at the chart below -- the dividend has not only been volatile over time but it has been trending lower for years. The stock price has followed the dividend lower. And yet, if you reinvested the dividend, your total return would have been strongly positive. The big takeaway here is that if you spend AGNC's dividend on living expenses, like most dividend investors are probably looking to do, you will end up with less income and less capital.

AGNC data by YCharts.

One more reason for dividend investors to avoid AGNC

AGNC Investment proudly noted that it sold stock to raise capital when it reported third-quarter 2024 results. That's not unusual at all; REITs issue stock to fund investments all the time. But here's the oddity: The CFO noted, "During the third quarter, we issued $781 million in common stock through our ATM program at a considerable premium to our tangible net book value." To simplify that just a little, the company sold stock for more than the company's shares were really worth.

Remember that AGNC is similar to a mutual fund. Its value is, essentially, the value of the mortgage bonds it owns, a figure the company reports every quarter. The book value, which would be akin to a net asset value for a mutual fund, ended the third quarter at $8.82 per share. The current price of the stock on Wall Street is around $9.50 per share. So all AGNC did was sell stock at the market, and it was selling that stock at a "considerable premium" to what it was worth.

That is definitely beneficial to existing shareholders, but it seems like it would be a bad idea for most investors to buy something for more than it's worth. The oddity here is that this particular something has a huge 15% dividend yield. That's a yield number that could cloud the judgment of even the most conservative income investor.

If you are thinking about buying this REIT, take a second look at the dividend chart above if you actually hope to live off of the income your portfolio generates. AGNC Investment isn't a reliable dividend stock and probably never will be. Then, consider that management is telling you that the stock price in the market is trading at a "considerable premium" to the actual value of the company.

AGNC Investment is a perfectly fine mortgage REIT

Here's the final little complexity with AGNC Investment: It isn't meant to be an income investment; it is meant to be a total return investment. And as the dividend chart above also shows, reinvesting the dividend leads to a solid total return over time. That's something that an asset allocation-focused investor will appreciate. If dividend income is your goal, however, overpaying for AGNC Investment's ultra-high yield is more likely to set you up for pain than gain.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.