Updated on September 8th, 2022 by Josh Arnold
AGNC Investment Corp (AGNC) has an extremely high dividend yield of 12.3%, which is something this stock is certainly known for. In terms of current dividend yield, AGNC is near the very top of our list of high-yield dividend stocks, particularly given its size.
In addition, AGNC pays its dividend each month, rather than on a quarterly or semi-annual basis, as is the case with most dividend stocks.
Monthly dividends give investors the ability to compound dividends even faster. There are not many monthly dividend stocks, as the administrative burden on the companies paying the dividends is higher than paying quarterly, for example.
Indeed, there are only 49 stocks that currently pay monthly dividends. You can download our full Excel spreadsheet of all monthly dividend stocks (along with metrics that matter like dividend yields and payout ratios) by clicking on the link below:
That said, it is also important for investors to assess the sustainability of such a high dividend yield, as yields in excess of 10% are often a sign of fundamental challenges facing the business. Double-digit dividend yields often signal that investors do not believe the dividend is sustainable. This article will discuss AGNC’s business model, and whether the stock is appealing to income investors.
AGNC was founded in 2008 and is an internally-managed REIT. Whereas most REITs own physical properties that are leased to tenants, AGNC has a different business model. It operates in a niche of the REIT market: mortgage securities.
AGNC invests in agency mortgage-backed securities. It generates income by collecting interest on its invested assets, minus borrowing costs. It also records gains or losses from its investments and hedging practices. Agency securities are those that have principal and interest payments guaranteed by either a government-sponsored entity, or the government itself. They theoretically carry less risk than private mortgages.
The trust employs significant amounts of leverage to invest in these securities in order to boost its ability to generate interest income. AGNC borrows primarily on a collateralized basis through securities structured as repurchase agreements.
The trust’s stated goal is to build value via a combination of monthly dividends and net asset value accretion. AGNC has done well with its dividends over time, but net asset value creation has sometimes proven elusive.
Indeed, the trust has paid more than $44 of total dividends per share since its IPO; the share price today was just under $12. That sort of track record is extraordinary and is why some investors are drawn to the stock.
AGNC reported its Q2 2022 results on July 25, 2022. Q2 net spread and dollar roll income per share stood at 83 cents, up from 72 cents sequentially. Tangible net book value stood at $11.43 as of June 30, 2022. Economic return on tangible common equity stood at -10.1% compared to -14.4% sequentially. AGNC also reported a net loss per common share of $(0.87). The company’s investment portfolio as of June 30, 2022, stood at $61.3 billion.
A more detailed breakdown of AGNC’s second-quarter performance can be seen in the image below:
Source: Investor Presentation
Furthermore, the trust at an average repurchase price of $10.78 per share repurchased 4.7 million common shares. Meanwhile, cash and unencumbered agency MBS amounted to approximately $2.8 billion at quarter end. We note the stock trades very close to its reported tangible net book value per share as of the end of the quarter.
The major drawback to mortgage REITs is that the business model is negatively impacted by rising interest rates. AGNC makes money by borrowing at short-term rates, lending at long-term rates, and pocketing the difference. To amplify returns, mortgage REITs are also highly leveraged. It is common for mortgage REITs to have leverage rates of 5X or more because spreads on these securities tend to be quite tight.
In a rising interest-rate environment, mortgage REITs typically see the value of their investments reduced. And, higher rates usually cause their interest margins to contract as the payment received is fixed in most cases, but borrowing costs are variable. This double-impact is what investors experienced most recently in 2018 when spreads contracted and book value fell.
However, as interest rates once again fell starting in 2019, AGNC saw the benefit as its spreads stabilized as well, allowing it to produce economic earnings.
Interest rates are once again back on the rise, as the Federal Reserve has hiked rates multiple times in an attempt to reduce inflation. The trust’s book value has contracted in recent quarters as a result of these moves in interest rates.
Overall, the high payout ratio and the volatile nature of the business model will harm earnings per share growth. We also believe that dividend growth will be anemic for the foreseeable future.
AGNC has declared monthly dividends of $0.12 per share since April 2020. This means AGNC has an annualized payout of $1.44 per share, which equals a high current yield of 12.3% based on the current share price, which has been very weak in recent months as rates have risen.
Source: Investor Presentation
High yields can be a sign of elevated risk. And, AGNC’s dividend does carry significant risk. AGNC has reduced its dividend several times over the past decade, including dividend cuts in 2020 and in 2021.
We do not see a dividend cut as an imminent risk at this point given that the payout was fairly recently cut to account for unfavorable interest rate movements and that AGNC’s net asset value appears to have stabilized. Management has taken the necessary steps to protect its interest income, so we don’t see another dividend cut in the near term. In fact, we see the payout ratio remaining below 60% of earnings for the foreseeable future. If that’s the case, there would be no reason to cut the payout as AGNC can currently quite easily afford its dividend.
However, with any mortgage REIT, there is always a significant risk to the payout, and that is something investors should keep in mind, particularly given the volatile behavior of interest rates in recent years.
High-yield monthly dividend paying stocks are extremely attractive for income investors, at least on the surface. This is particularly true in an environment of low interest rates, as alternative sources of income generally have much lower yields. AGNC pays a hefty yield of 12.3% right now, which is very high by any standard.
We believe the REIT’s high yield to be safe for the near future, but this is hardly a low-risk situation given the company’s business model and interest-rate sensitivity. While AGNC should continue to pay a dividend yield many times higher than the S&P 500 Index average, it is not an attractive option for risk-averse income investors.
If you are interested in finding more high-quality dividend growth stocks suitable for long-term investment, the following Sure Dividend databases will be useful:
- The 20 Highest Yielding Dividend Aristocrats
- The Dividend Kings List is even more exclusive than the Dividend Aristocrats. It is comprised of 40 stocks with 50+ years of consecutive dividend increases.
- The 20 Highest Yielding Dividend Kings
- The Dividend Achievers List: a group of stocks with 10+ years of consecutive dividend increases.
- The Dividend Champions List: stocks that have increased their dividends for 25+ consecutive years.
Note: Not all Dividend Champions are Dividend Aristocrats because Dividend Aristocrats have additional requirements like being in The S&P 500.
- The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.
- The Monthly Dividend Stocks List: contains stocks that pay dividends each month, for 12 payments per year.
- The 20 Highest Yielding Monthly Dividend Stocks
- The High Dividend Stocks List: high dividend stocks are suited for investors that need income now (as opposed to growth later) by listing stocks with 5%+ dividend yields.
The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them monthly: