Monthly Dividend Stock In Focus: AGNC Investment Corp.

Up to date on Could 18th, 2023 by Bob Ciura

AGNC Funding Corp (AGNC) has an especially excessive dividend yield of 15.6%. When it comes to present dividend yield, AGNC is close to the very high of our record of high-yield dividend shares.

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

There are 84 month-to-month dividend shares in our database. You may 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 under:

That mentioned, it is usually essential 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 going through the enterprise. Double-digit dividend yields usually sign that buyers don’t imagine 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 earnings 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 earnings by gathering curiosity on its invested belongings, minus borrowing prices. It additionally data features 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.

The belief employs important quantities of leverage to spend money on these securities to be able to enhance its capacity to generate curiosity earnings. AGNC borrows totally on a collateralized foundation via securities structured as repurchase agreements.

The belief’s said purpose is to construct worth by way of a mixture of month-to-month dividends and web asset worth accretion. AGNC has completed effectively with its dividends over time, however web asset worth creation has typically confirmed elusive.

Certainly, the belief has paid roughly $45 of whole dividends per share since its IPO; the share value at this time is simply over $9. That kind of monitor file 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 occasions the present worth of the inventory.

AGNC reported its Q1 2023 outcomes on April twenty fourth, 2023.

Supply: Investor Presentation

AGNC reported reporting a complete lack of $(0.07) per widespread share, together with a web lack of $(0.31) per widespread share and $0.70 web unfold and greenback roll earnings per widespread share. The corporate additionally declared $0.36 dividends per widespread share for the quarter.

The funding portfolio as of March 31, 2023, was $56.8 billion, and the tangible web e book worth per widespread share was $9.41. AGNC issued 17.1 million widespread shares via At-the-Market choices, elevating $171 million.

Development 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 is not uncommon 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 surroundings, mortgage REITs sometimes see the worth of their investments lowered. And, greater charges normally trigger their curiosity margins to contract because the fee obtained is mounted usually, however borrowing prices are variable. This double-impact is what buyers skilled most not too long ago in 2018 when spreads contracted and e book worth fell.

Nonetheless, as rates of interest as soon as once more fell beginning in 2019, AGNC noticed the profit as its spreads stabilized as effectively, permitting it to supply financial earnings.

Rates of interest are as soon as once more again on the rise, as central banks around the globe have aggressively hiked charges in an try to scale back inflation. The belief’s e book worth contracted in latest quarters because of these strikes in rates of interest.

General, the excessive payout ratio and the risky nature of the enterprise mannequin will hurt earnings-per-share development. We additionally imagine that dividfinish development will likely 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 an especially excessive present yield of 16.6% based mostly on the present share value.

Supply: Investor Presentation

Excessive yields is usually a signal of elevated danger. And, AGNC’s dividend does carry important danger. AGNC has lowered its dividend a number of occasions over the previous decade, together with dividend cuts in 2020 and in 2021.

We don’t see a dividend lower as an imminent danger at this level provided that the payout was pretty not too long ago lower to account for unfavorable rate of interest actions and that AGNC’s web asset worth seems to have stabilized. Administration has taken the required steps to guard its curiosity earnings, so we don’t see one other dividend lower within the close to time period.

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

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

Ultimate Ideas

Excessive-yield month-to-month dividend paying shares are extraordinarily engaging for earnings buyers, at the very least on the floor. That is significantly true in an surroundings of low rates of interest, as different sources of earnings typically have a lot decrease yields. AGNC pays a hefty yield of 15.6% proper now, which may be very excessive by any commonplace.

We imagine the REIT’s excessive yield to be protected for the close to future, however that is hardly a low-risk scenario given the corporate’s enterprise mannequin and interest-rate sensitivity. Whereas AGNC ought to proceed to pay a dividend yield many occasions greater than the S&P 500 Index common, it’s not a lovely choice for risk-averse earnings buyers.

Don’t miss the assets under for extra month-to-month dividend inventory investing analysis.

And see the assets under for extra compelling funding concepts for dividend development shares and/or high-yield funding securities.