Monthly Dividend Stock In Focus: AGNC Investment Corp.

Up to date on November seventeenth, 2023 by Bob Ciura

AGNC Funding Corp (AGNC) has a particularly excessive dividend yield above 16%. By way of present dividend yield, AGNC is close to the very high of our checklist of high-yield dividend shares.

As well as, AGNC pays its dividend every month, quite than on a quarterly or semi-annual foundation. Month-to-month dividends give buyers the flexibility to compound dividends even sooner.

There are 84 month-to-month dividend shares in our database. You possibly can obtain our full Excel spreadsheet of all month-to-month dividend shares (together with metrics that matter like dividend yields and payout ratios) by clicking on the hyperlink beneath:

That mentioned, additionally it is necessary for buyers to evaluate the sustainability of such a excessive dividend yield, as yields in extra of 10% are sometimes an indication of basic challenges dealing with the enterprise.

Double-digit dividend yields usually sign that buyers don’t consider the dividend is sustainable, and are pricing the inventory in anticipation of a lower to the dividend.

This text will talk about AGNC’s enterprise mannequin, and whether or not the inventory is interesting to revenue buyers.

Enterprise Overview

AGNC was based in 2008 and is an internally-managed REIT. Whereas most REITs personal bodily properties which are leased to tenants, AGNC has a distinct enterprise mannequin. It operates in a distinct segment of the REIT market: mortgage securities.

AGNC invests in company mortgage-backed securities. It generates revenue by accumulating curiosity on its invested belongings, minus borrowing prices. It additionally information positive factors or losses from its investments and hedging practices.

Company securities are people who have principal and curiosity funds assured by both a government-sponsored entity, or the federal government itself. They theoretically carry much less danger than personal mortgages.

Supply: Investor Presentation

The belief employs vital quantities of leverage to spend money on these securities with the intention to enhance its capacity to generate curiosity revenue. AGNC borrows totally on a collateralized foundation by means of securities structured as repurchase agreements.

The belief’s acknowledged objective is to construct worth through a mix of month-to-month dividends and internet asset worth accretion. AGNC has accomplished properly with its dividends over time, however internet asset worth creation has typically confirmed elusive.

Certainly, the belief has paid roughly $47 of whole dividends per share since its IPO; the share worth at the moment is simply over $9. That kind of observe report is extraordinary and is why some buyers are drawn to the inventory.

In different phrases, the belief has distributed money per-share to shareholders of about 4 instances the present worth of the inventory.

AGNC reported its Q3 2023 outcomes on October thirtieth. The corporate reported a complete lack of $1.02 per frequent share, which included a internet lack of $0.68 per frequent share and one other complete loss (OCI) of $0.34 per frequent share on investments marked-to-market by means of OCI.

Regardless of these losses, AGNC reported a $0.65 internet unfold and greenback roll revenue per frequent share, excluding an estimated “catch-up” premium amortization profit.

The tangible internet ebook worth per frequent share was reported as $8.08 as of September 30, 2023, reflecting a lower of $1.31 per frequent share, or -14.0%, from the tip of the earlier quarter.

Progress Prospects

The main disadvantage to mortgage REITs is that the enterprise mannequin is negatively impacted by rising rates of interest. AGNC makes cash by borrowing at short-term charges, lending at long-term charges, and pocketing the distinction. To amplify returns, mortgage REITs are additionally extremely leveraged. It’s common for mortgage REITs to have leverage charges of 5X or extra as a result of spreads on these securities are usually fairly tight.

In a rising interest-rate setting, mortgage REITs usually see the worth of their investments diminished. And, increased charges often trigger their curiosity margins to contract because the cost obtained is fastened normally, however borrowing prices are variable.

Rates of interest are as soon as once more again on the rise, as central banks world wide have aggressively hiked charges in an try to cut back inflation. The belief’s ebook worth contracted in latest quarters on account of these strikes in rates of interest.

General, the excessive payout ratio and the unstable nature of the enterprise mannequin will hurt earnings-per-share progress. We additionally consider that dividfinish progress might be anemic for the foreseeable future.

Dividend Evaluation

AGNC has declared month-to-month dividends of $0.12 per share since April 2020. This implies AGNC has an annualized payout of $1.44 per share, which equals a particularly excessive present yield of 15.1% primarily based on the present share worth.

Supply: Investor Presentation

Excessive yields generally is a signal of elevated danger. And, AGNC’s dividend does carry vital danger. AGNC has diminished its dividend a number of instances over the previous decade.

We don’t see a dividend lower as an imminent danger at this level on condition that the payout was pretty lately lower to account for unfavorable rate of interest actions and that AGNC’s internet asset worth seems to have stabilized. Administration has taken the mandatory steps to guard its curiosity revenue, so we don’t see one other dividend lower within the close to time period.

In reality, we see the payout ratio remaining beneath 75% of earnings for the foreseeable future. If that’s the case, there can be no cause to chop the payout.

Nevertheless, with any mortgage REIT, there may be all the time a major danger to the payout, and that’s one thing buyers ought to take into accout, significantly given the unstable habits of rates of interest in recent times.

Ultimate Ideas

Excessive-yield month-to-month dividend paying shares are extraordinarily enticing for revenue buyers, a minimum of on the floor. That is significantly true in an setting of low rates of interest, as different sources of revenue typically have a lot decrease yields. AGNC pays a hefty yield of 16.5% proper now, which could be very excessive by any customary.

We consider the REIT’s excessive yield to be protected for the close to future, however that is hardly a low-risk state of affairs given the corporate’s enterprise mannequin and interest-rate sensitivity.

Whereas AGNC ought to proceed to pay a dividend yield many instances increased than the S&P 500 Index common, it isn’t a horny possibility for risk-averse revenue buyers.

Don’t miss the sources beneath for extra month-to-month dividend inventory investing analysis.

And see the sources beneath for extra compelling funding concepts for dividend progress shares and/or high-yield funding securities.