Updated May 17, 2021 by Bob Ciura
AGNC Investment Corp (AGNC) has a very high dividend yield of nearly 8%, which this stock is certainly known for. In terms of dividend yield, AGNC is high on our list of high yield dividend stocks. And this follows a sizeable rally in the stock over the past few months.
In addition, AGNC pays its dividend every month rather than quarterly or semi-annually like most dividend stocks do.
Monthly dividends give investors the opportunity to put dividends together even faster. There aren’t many monthly dividend stocks because the administrative burden for the companies paying the dividends is higher than, say, the quarterly payment.
In fact, there are only 56 stocks that pay dividends monthly. You can download our full Excel spreadsheet of all monthly dividend stocks (along with metrics like dividend yields and payout ratios) by clicking the link below:
Still, it’s also important for investors to assess the sustainability of such a high dividend yield, as returns greater than 7% are sometimes a sign of fundamental challenges for the company. This article discusses AGNC’s business model and whether the stock appeals to high-income investors.
AGNC was founded in 2008 and is an internally managed REIT. While most REITs have physical properties that are rented out 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 charging interest on its invested assets minus borrowing costs. It also records gains or losses on its investments and hedging practices.
The Trust uses significant leverage to invest in these securities and improve its ability to generate interest income. AGNC borrows primarily on a secured basis through securities structured as repurchase agreements.
The Trust’s stated aim is to achieve growth through a combination of monthly dividends and appreciation of the net asset value. AGNC has done well with its dividends over time, but creating net asset value has proven elusive at times.
In fact, the Trust has paid a total of $ 43.24 in dividends per share since it went public. The share price is a little over $ 18 today. This type of track record is exceptional and this is why some investors are drawn to the stock.
AGNC reported its Q.1 2021 Results on April 26 ..2021. N.Earnings per share were 7 spread and dollar roll6th cent. The forward purchase and sale of the agency MBS by AGNC on the TBA market was partly responsible for this success The brought the average net long position to $32.0 Billion.
A more detailed breakdown of AGNC’s performance in the first quarter can be seen in the image below:
Source: Investor Presentation
The company’s net book value per common share also showed one increase from $16.71 on December 312020 to $ 17.72 from March 312021. The 36 cents dividends per common share and the $ 1.01 increasese in TNBV generates one per common share 8.2% economic return on material equity for Q.1.
AGNC’s hedging portfolio, mainly compromised of intermediate and longer– –Term hedges, Likewise contributed to positive results of the company this quarter.
The main disadvantage of mortgage REITs is that the business model is negatively affected by rising interest rates. AGNC makes money by borrowing at short term rates, lending at long term rates, and pocketing the difference. Mortgage REITs are also leveraged to a large extent in order to increase returns.
In an environment of rising interest rates, mortgage REITs tend to depreciate the value of their investments. And higher interest rates usually lead to a decrease in interest margins. Investors last experienced this double effect in 2018, when spreads narrowed and book values fell.
However, when interest rates began to fall again from 2019 onwards, AGNC saw the benefit in that spreads also stabilized, allowing it to generate economic gains. To offset some of the inherent volatility in interest rate behavior, AGNC has used hedging to reduce interest rate risk.
A total of, the high payout ratio and the volatility of the Business model will Damage per Stock growth after a first snapshot– –back after this year’s disruption. We also believe in sharingThe end of growth will be anemic for the foreseeable future.
AGNC has decided to pay a monthly dividend of $ 0.12 per share since April 2020. This means that AGNC has a dividend yield of 7.9%. While the return is much lower than in previous years (AGNC has achieved over 10% at times), it is still a very high return.
High returns can be a sign of increased risk. AGNC’s dividend carries significant risk. AGNC has cut its dividend several times over the past decade and also in 2020.
We do not currently see a dividend cut as an immediate risk as the payout was cut relatively recently due to adverse interest rate movements and 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 any further dividend cut in the short term.
However, there is always significant risk to the payout of any mortgage REIT and this is something investors should keep in mind, especially given the volatile behavior of interest rates over the past few years.
High-yield stocks are extremely attractive to high-income investors, at least on the surface. This is especially true in a low interest rate environment. AGNC is currently paying a hefty return of almost 8% which is very high.
We believe the return is certain 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 average of the S&P 500 Index, this is not an attractive option for risk-averse income investors.
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