Updated on May 17th, 2021 by Bob Ciura
AGNC Investment Corp (AGNC) has a very high dividend yield of nearly 8%, which is something this stock is certainly known for. In terms of dividend yield, AGNC is near the top of our list of high-yield dividend stocks. And, this is following a sizable rally in the stock in the past few months.
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 55 stocks that pay dividends monthly. 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 7% are sometimes a sign of fundamental challenges facing the business. 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.
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 $43.24 of total dividends per share since its IPO; the share price today is just over $18. That sort of track record is extraordinary, and is why some investors are drawn to the stock.
AGNC reported its Q1 2021 results on April 26th, 2021. Net spread and dollar roll income per share stood at 76 cents. Partially responsible for this success was AGNC’s forward purchase and sales of agency MBS in the TBA market that brought the average net long position to $32.0 billion.
A more detailed breakdown of AGNC’s first-quarter performance can be seen in the image below:
Source: Investor Presentation
The company’s net book value per common share also showed an increase from $16.71 on December 31, 2020 to $17.72 as of March 31, 2021. The 36 cents in dividends per common share and the $1.01 increase in TNBV per common share generated an 8.2% economic return on tangible common equity for Q1.
AGNC’s hedge portfolio, mainly comprised of intermediate and longer–term hedges, also contributed to the company’s positive results this 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.
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. 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. To offset some of the inherent volatility in the way interest rates behave, AGNC has employed hedges to mitigate its interest rate risk.
Overall, the high payout ratio and the volatile nature of the business model will harm earnings per share growth after an initial snap–back after this year’s disruption. 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 a 7.9% dividend yield. While the yield is much lower than it has been in previous years (AGNC has at times yielded over 10%), it is still a very high yield.
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, and again in 2020.
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.
However, with any mortgage REIT, there is always 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 stocks are extremely attractive for income investors, at least on the surface. This is particularly true in an environment of low interest rates. AGNC pays a hefty yield of nearly 8% right now, which is very high.
We believe the yield to be safe for the foreseeable 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.