Could Buying AGNC Investment Stock Today Set You Up for Life?

When investors start saving for the future, they usually focus on increasing their nest eggs. That tends to shift as investors near or enter retirement, when the goal changes to living off that nest egg, which is why many investors look to dividend-paying stocks like real estate investment trusts (REITs). But all dividend payers are not the same and, sometimes, a high yield is an indication of risk, which is why investors considering mortgage REIT AGNC Investment (NASDAQ: AGNC) and its huge 15.5% dividend yield should think twice before hitting the buy button.

What does AGNC Investment do?

AGNC Investment is a real estate investment trust, a business structure that is specifically designed to pass income on to investors in a tax-advantaged manner. That said, REITs were created with the intent of allowing small investors access to institutional-level properties, like office and apartment buildings. While AGNC Investment is a REIT, it doesn't buy physical properties like many other REITs.

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Instead, AGNC Investment buys mortgages that have been pooled together into bond-like securities. This is definitely an institutional-level investment realm, so the basic premise of the REIT structure remains in place. But the mortgage market is very different from buying a building, which most investors can get their heads around pretty easily. Mortgage securities values can be affected by things like interest rates, repayment rates, delinquency rates, and housing market dynamics. In a nutshell, AGNC Investment operates in a very complex niche of the REIT world.

To add more complexity to the picture, AGNC Investment, like most mortgage REITs, uses leverage or debt in an effort to enhance shareholder returns. Essentially, it earns the difference between the interest it collects on its securities investments and its operating costs, which includes both management expenses and interest expenses. While leverage can enhance returns, it can also enhance losses in bad markets. So the use of leverage adds to the risk profile here, especially given that mortgage securities trade every day (unlike a physical building that will be bought and sold relatively infrequently).

Data source: YCharts.

Dividend yield is strong -- with a catch

The trouble with analyzing AGNC Investment is that you have to dig into the story and then examine how it fits within your own personal portfolio goals. As the chart above highlights, AGNC Investment's total return has been solid since its initial public offering (IPO) in 2008. While not quite matching the S&P 500 index (SNPINDEX: ^GSPC) it hasn't dramatically underperformed either. If you are trying to build a portfolio around an asset allocation model that includes mortgages, AGNC Investment would be a reasonable choice.

But what about that 15.5% dividend yield? That's going to attract dividend investors, not asset allocators. This is where things get harder because the total return graph above assumes dividends are reinvested in AGNC Investment shares. If you are reinvesting dividends, you can't use those dividends to pay living expenses. So what does AGNC Investment's performance look like if you spend the huge dividend?

Data source: YCharts.

After a quick spike higher in the dividend and stock price, both have been in a steady decline for years. To be fair, the mortgage REIT has paid out more in dividends than it has lost in its stock price, which is why the total return is so impressive. But if you spent the dividend, you would now have less capital due to declines in the stock price and less income thanks to dividend cuts. That's not something most dividend investors are likely to want.

Not the best option for most investors

There are some investors who will find AGNC Investment's unique return profile attractive. But for investors looking to be set up with a reliable and preferably a growing income stream, this REIT is going to be a letdown. From the complexity of the mortgage REIT sector to the difficulty in analyzing how well AGNC Investment is performing, this high-ultra yielder is best avoided by most dividend investors.

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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.