AGNC Investment Corp: Can You Count on This 11.8% Yield (Paid Monthly)?
Should Investors Consider This High-Yield Stock?
In this day and age, it’s quite rare to see a company with an annual dividend yield of over 10%. What’s even rarer is that this double-digit yielder also follows a monthly distribution schedule.
I’m talking about AGNC Investment Corp (NASDAQ:AGNC), a real estate investment trust (REIT) headquartered in Bethesda, Maryland.
Last week, AGNC declared a monthly cash dividend of $0.16 per share. With AGNC stock trading at $16.24 apiece, that translates to an annual yield of 11.8%.
Seeing a yield higher than the vast majority of stocks on the market—and a more frequent payout schedule—it’s only natural to ask: can the company cover its payout?
To find out the answer, let’s first take a look at AGNC’s business.
Today, most of the well-known REITs on the market are basically giant landlords. They own portfolios of properties and collect rent from their tenants. AGNC Investment Corp, on the other hand, is quite a bit different, as the company focuses on the mortgage side of the business.
As of June 30, AGNC had a $104.4-billion investment portfolio, $91.6 billion of which was invested in agency mortgage-backed securities (MBS). (Source: “Q2 2019 Stockholder Presentation,” AGNC Investment Corp, July 25, 2019.)
For those not in the know, with an agency MBS, the principal and interest payments are backed by one of the three quasi-governmental agencies: the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), or the Government National Mortgage Association (Ginnie Mae).
AGNC Investment Corp Financials
Due to its sizable agency MBS portfolio, AGNC makes money primarily from the interest earned on its investments. And in return, the company passes that income to investors through monthly dividend payments.
Last year, AGNC Investment Corp generated $2.35 per share in net spread and dollar roll income. During the year, the company declared total dividends of $2.16 per share. Therefore, AGNC’s profits covered its payout in 2018. (Source: “AGNC Investment Corp. Announces Fourth Quarter 2018 Financial Results,” AGNC Investment Corp, January 30, 2019.)
In the first quarter of this year, AGNC Investment Corp’s net spread and dollar roll income came in at $0.52 per share. Its declared dividends, on the other hand, totaled $0.54 per share. That means the company’s profits were not enough to support the payout. (Source: “AGNC Investment Corp. Announces First Quarter 2019 Financial Results,” AGNC Investment Corp, April 24, 2019.)
It didn’t help that the market outlook wasn’t exactly bright for this mortgage REIT.
President and Chief Operating Officer Peter Federico said the following:
Looking ahead, with the Federal Reserve expected to hold short term rates steady and an even more dovish stance communicated by the European Central Bank, the LIBOR-repo rate funding dynamic that AGNC enjoyed throughout 2018 is unlikely to return to the previously favorable levels in the near term. Further, we expect dollar roll specialness to remain relatively minimal and amortization expense to remain relatively constant.
He added, “Against this backdrop, we anticipate reducing our monthly common stock dividend to $0.16 per share beginning with the dividend to be declared in May 2019.” (Source: Ibid.)
And that plan was followed through on. In May 2019, the company approved a monthly cash dividend rate of $0.16 per share, representing an 11.1% cut from AGNC stock’s prior monthly payment of $0.18 per share. (Source: “Dividends,” AGNC Investment Corp, last accessed August 15, 2019.)
So, has the situation improved with the lowered dividends? Well, for the second quarter, AGNC Investment Corp earned a net spread and dollar roll income of $0.49 per share while declaring $0.50 in dividends per share. So while AGNC did not cover its payout, it came awfully close. (Source: “AGNC Investment Corp. Announces Second Quarter 2019 Financial Results,” AGNC Investment Corp, July 24, 2019.)
The Bottom Line on AGNC Investment Corp
At the end of the day, few things look more attractive than a monthly dividend stock with a double-digit yield. If AGNC Investment Corp can improve its dividend coverage, then AGNC stock’s oversized yield would be worth considering.