Is the Sustainability of This Stock's Significant 14.3% Dividend Yield Questionable?
Pumping Up Your Portfolio with AGNC Investment 💸
Wanna boost your portfolio with a high-yield stock? AGNC Investment (AGNC 0.59%) might be worth a peek, sporting a whopping 14.3% forward dividend yield. But here's the big question - is this yield sustainable? We're diving deep into AGNC's business model to sort out if it's a high-yield trap or a savvy income investment.
AGNC ain't your regular REIT 🏠
AGNC? Yeah, it's a Real Estate Investment Trust (REIT). But unlike some traditional REITs (REITS? 😜) that buy properties and collect rent, AGNC is a mortgage REIT (mREIT). It sidelines real estate ownership for a different game - origination of mortgages and purchases of mortgage-backed securities (MBS) to bank its profits.
Like traditional REITs, AGNC must cough up at least 90% of its pre-tax net income to maintain that juicy tax advantage. But instead of tracking profits via adjusted funds from operations (FFO), mREITs, like AGNC, measure profitability through their net spread and dollar roll income per share.
The net spread is the yield AGNC makes on its mortgages and MBS minus the cost of financing it. The dollar roll income comes from selling its to-be-announced (TBA) MBS for current delivery while agreeing to buy similar MBS in the future.
When interest rates go up, both figures usually do too. But over the past year, AGNC's net spread and dollar roll income per share, along with its tangible net book value per share, dipped as interest rates took a nosedive.
Net Spread and Dollar Roll Income per Share
| Metric | Q4 2023 | Q1 2024 | Q2 2024 | Q3 2024 | Q4 2024 || ------------ | ------- | ------- | ------- | ------- | ------- || Net Spread | $0.60 | $0.58 | $0.53 | $0.43 | $0.37 || Dollar Roll | - | - | - | - | - || Tangible Net Book Value | $8.70 | $8.84 | $8.40 | $8.82 | $8.41 |
$0.60
Data source: AGNC.
$0.58
For the year, AGNC's net spread and dollar roll income plummeted 28% to $1.88 per share as the Federal Reserve chopped interest rates three times. But it still handily covered its $1.44 in dividends per share.
$0.53
But can it hold that massive yield as interest rates crumble? 💔
$0.43
AGNC's gamble might seem risky, but a whopping 89.4% of its $73.3 billion portfolio is dedicated to Agency MBS assets, which are backed by Fannie Mae, Freddie Mac, or Ginnie Mae. That sturdy government support should shield it from a major mortgage crisis. Its riskier new TBA mortgages account for just 9.4% of its portfolio.
$0.37
For 2025, analysts foresee AGNC's net spread and dollar roll income sliding 15% to $1.60 per share as interest rates keep shrinking. That would still comfortably cover its forward dividend of $1.44 per share, but investors may squirm over bigger rate cuts.
AGNC seems unfazed. According to its latest conference call, CEO Peter Federico is still optimistic about Agency MBS in 2025, stating that the Fed has tipped its monetary policy stance for the better and begun the journey of returning short-term rates to a "neutral level."
Tangible Net Book Value per Share
Translation? AGNC doesn't want interest rates to soar (‘cause that'd tank the real estate market), but also doesn't want them to dive too low (‘cause that'd jeopardize its net spread income). So while slower interest rate cuts (perhaps now a reality thanks to Trump's capricious tariffs, global tensions, and stubborn inflation) might not be the zippiest news, they could actually soften the blow and help AGNC maintain its colossal dividend yield.
$8.70
AGNC's mouth-watering 14.3% dividend seems safe... for now 🤑
$8.84
AGNC's sky-high yield might make you wonder if it's too good to be true, but it should remain sustainable for now. Additionally, it looks like a steal: At $10 a share, it trades at just 6 times its projected net spread and dollar roll income per share for 2025.
$8.40
That high yield and low valuation puts a limit on its downside potential, but investors shouldn't just toss it into their portfolios and forget about it. Instead, they should keep a close eye on interest rates and how they impact the mortgage market. If interest rates start charging uphill or plummet without warning, AGNC could lose its balance and slash its exorbitant dividends.
$8.82
[1] YCharts[3] American Banker[5] Investopedia, The Motley Fool[Source] Investopedia, U.S. Securities and Exchange Commission, AGNC Investment Corp.
$8.41
- Despite being a mortgage REIT, AGNC's business model is distinct from traditional REITs as it focuses on origination of mortgages and purchases of mortgage-backed securities.
- To maintain its tax advantage, AGNC must distribute at least 90% of its pre-tax net income, unlike traditional REITS which track profits via adjusted funds from operations (FFO).
- For the year, AGNC's net spread and dollar roll income per share dipped as interest rates took a nosedive, but it still handily covered its dividends per share.
- At $10 a share, AGNC trades at just 6 times its projected net spread and dollar roll income per share for 2025, making it seem like a steal with a high yield.