Should you buy AGNC Investments (and its 14% yield) while it’s under $10?

Actions of AGNC Investments (NASDAQ: AGNC) have increased by almost 40% in the last year. But when you add the mortgage real estate investment trust’s (REIT) whopping 14.5% dividend yield to the mix, its total return (which assumes reinvestment of dividends) was an even more impressive 60% or so. This is a huge total return and easily beats the 42% total return of S&P 500 index. Is there more to come as AGNC Investment’s share price rises from the $10 price level?

What does AGNC Investment do?

There are two important facts to glean from AGNC Investment a mortgage REIT. First, REITs are designed to pass income to shareholders in a tax-advantaged manner. A REIT can only remain a REIT if it pays out at least 90% of its taxable income in the form of dividends. So dividends are a very important piece of the puzzle with AGNC Investment. Second, AGNC invests in mortgages.

AgNO given by YCharts

A REIT that owns properties it is quite simple to understand. It buys a physical asset (some kind of building) and rents it to a tenant, collecting rent along the way. That rent is used to fund dividends. A mortgage REIT buys mortgage securities, which are often bond-like investments that are made up of mortgages that have been bundled into a single interest-paying security. Very often, leverage is used in an effort to increase returns.

In total, AGNC Investment’s cash flow is the difference between the interest it earns on its portfolio of mortgage securities and the costs it incurs to buy them (which includes management expenses and interest expenses). It is very different from owning property.

AGNC Investment reports what it means a net asset valuewhich he calls tangible book value. Tangible book value, such as NAV, is the value of AGNC Investment’s portfolio divided by the number of shares it has outstanding. At the end of the third quarter of 2024, the tangible book value was $8.82 per share. Still, the stock is trading closer to $10 per share.

Is AGNC Investment worth buying?

For starters, mortgage REITs are pretty complex businesses. A lot of things can influence the price of a mortgage guarantee, including interest rateshousing market dynamics, mortgage repayment rates, and even the year a mortgage bond was created, among others. Unless you’re willing to take the time to learn about the mortgage REIT sector, you probably shouldn’t approach a REIT like AGNC Investment. And even if you take the time to understand the mortgage REIT sector, you’ll still find it very difficult to follow AGNC Investment’s portfolio.

Then there are 14.5% dividend yield. Although it looks incredibly attractive, the yield seems to lead investors to assign a value to AGNC Investment that exceeds the value of its actual portfolio of assets (its tangible book value). So at nearly $10 per share, investors are overpaying. It seems likely that tangible book value will act as an anchor for the stock price, which helps explain why the stock is up $10 right now.

Leading up to of the Federal Reserve The 50 basis point interest rate cut, Wall Street was projecting a notable reversal in the direction of interest rates. But after this reduction, the outlook became less optimistic. Interest rates play an important role in how bonds are valued. If interest rate cuts don’t happen as expected during AGNC Investment’s strong share price run, then a move above $10 looks like it will be harder to come by.

AgNO given by YCharts

There is another problem here. AGNC Investment’s dividend history has been pretty grim for a long time, with a clear downward trend in the rearview mirror. This was accompanied by a drop in share price. If you tried to live off the income generated by your portfolio, that would have been a terrible outcome. And it wouldn’t be worth the risk to buy this REIT now, even if you thought it could break out above $10. There is clearly a very significant risk that the dividend will be unreliable given how unreliable it has been in the past.

A special type of REIT investment

Here’s the thing. While AGNC Investment is probably a bad choice for a dividend investor, it is not a bad mortgage investment. The reinvestment of the huge dividend more than makes up for the drop in share price and results in a solid total return. That dividend is what has turbocharged the return relative to the S&P 500 over the past year. But a material price advance from here will likely require more interest rate cuts. It doesn’t appear to be what Wall Street is expecting right now.

If you’re a dividend investor, getting AGNC Investment’s huge yield is probably a risky mistake. Despite this, if your focus is on total return, it could be an interesting way to add mortgage exposure a diversified portfolio. However, expecting the stock price to go much higher from here seems like a risky proposition as well.

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