AGNC Investment: Buy, Sell, or Hold?

AGNC Investment (NASDAQ: AGNC) offers an alluring monthly dividend that yields 14.7% annually. This means investors can earn $147 for every $1,000 invested in the company, making it a compelling option for those seeking passive income from their portfolios.

However, the stock price has fallen significantly over recent years, and investors' total return has been less than stellar, partly due to rising interest rates. The Federal Reserve is signaling potential interest rate cuts by the end of the year, which could make it a more appealing investment.

But is it suitable for your portfolio? Consider the following before you buy AGNC.

How AGNC powers its high dividend yield

AGNC uses leverage to invest in securities backed by residential mortgages. The principal and interest payments on these mortgages are guaranteed by U.S. government-sponsored enterprises like the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).

A person signs paperwork with a miniature model home in the background.

Investing in mortgage-backed securities gives the company a steady stream of payments as homeowners pay down their balances over time. As a mortgage real estate investment trust (mREIT), AGNC must distribute 90% of its annual taxable income to shareholders, making it an attractive dividend stock.

Mortgage-backed securities don't have huge yields. For example, AGNC's investment portfolio has a weighted average yield of around 4.5%. It uses leverage to juice returns and give investors a nearly 15% dividend yield. While this can boost returns during good times, it can also result in larger losses when market conditions are less favorable.

Throughout the 2010s, the mREIT was a solid investment choice, delivering a total return of 171%. Mortgage rates were relatively low and stable then, so AGNC didn't experience too many fluctuations from changing interest rates. However, the past few years have been a different story for the company.

Rising interest rates have weighed on mREITs

Rising interest rates can be a double-edged sword for a business like AGNC. On the one hand, they allow it to increase its portfolio yield by investing in mortgages with higher interest rates. Over the last two years, AGNC's portfolio yield went from 2.6% to 4.5%.

On the other hand, rising interest rates could result in a higher spread between the yield on its assets and the yields on benchmark rates linked to its interest rate hedges. As a leveraged company, unpredictable and volatile interest rates make it difficult for AGNC to hedge its portfolio. Higher rates also push down the value of AGNC's investment portfolio because of the inverse relationship between interest rates and price.

As interest rates rose rapidly in recent years thanks to the Federal Reserve's aggressive rate-hiking campaign, AGNC's tangible net book value per share went from $15.75 to $8.84, or a 43% decline. Over the same period, the total return for its shareholders (including reinvested dividends) was negative 8.8%.

AGNC total return level;

Things could be looking up for AGNC. The last interest rate hike from the Federal Reserve was in July 2023, and the central bank has since paused its rate-hiking campaign as it monitors ongoing data to ensure inflation gets closer to its 2% target rate.

Falling interest rates could be a potential tailwind for AGNC. The company has been able to invest in newer assets at higher yields, and falling rates could give its book value an added boost. Less interest rate volatility and a steepening yield curve would also benefit the mREIT, resulting in a rising net interest margin.

Is AGNC Investment right for you?

AGNC offers a high dividend yield, but it might not be one you can count on for the long haul. The company has a history of cutting its dividend, and over the past decade, its dividends have gradually fallen while its yield averaged 12.4%.

AGNC dividend;

AGNC is designed more for large institutional investors using an asset allocation model and isn't necessarily the best choice for investors looking for a reliable dividend stream they can count on for the long term.

If interest rates gradually fall or even undergo less volatility than they have in recent years, AGNC Investment is positioned to benefit from these tailwinds. But investors searching for a reliable dividend are better off going with a company with a more defined economic moat that isn't as sensitive to fluctuating interest rates.

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Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.