AGNC Investment Corporation, a type of company known as a mortgage real estate investment trust (mREIT), offers an impressive forward dividend yield of 15.7%. This high yield is paid out to shareholders on a monthly basis.
It could be seen as an appealing income substitute for the 10-year Treasury, which offers just a 4.5% yield, or other dividend stocks. However, over the past year, AGNC’s stock has actually dropped by 12%, resulting in a total return (including reinvested dividends) of less than 3%.
Is it a good idea for investors to purchase this high-dividend stock while the market seems to be ignoring it? To make an informed decision, let’s take a closer look at its business strategy, immediate obstacles, and current valuation.
How does AGNC make money?
I’m all about AGNC, it’s not your average Real Estate Investment Trust (REIT) like Realty Income (NYSE: O). Unlike traditional REITs that amass properties and lease them out, AGNC operates as a mortgage REIT (mREIT), focusing on creating its own mortgages and purchasing mortgage-backed securities (MBSes) rather than physical real estate. The income generated from these investments forms the basis of its net profits. Yet, much like conventional REITs, mREITs must distribute at least 90% of their taxable income as dividends to preserve a lower tax rate.
It could appear daring to fully invest in mortgages, but AGNC places a significant portion – about 89.2% – of its $78.9 billion portfolio into agency Mortgage-Backed Securities (MBS) assets, which are guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae. This government backing should protect it from another housing catastrophe or credit squeeze.
What happened to AGNC over the past year?
Instead of measuring their profitability through Funds From Operations (FFO) like other REITs, mREITs calculate their profits as “net spread and dollar roll income” per share. The net spread is the difference between the yield an mREIT earns on its investments and the costs associated with funding those assets. They generate dollar roll income by selling Mortgage-Backed Securities (MBS) for the current month and agreeing to repurchase them at a later date. Their strategy is to purchase these MBS back at a lower price, thereby securing a profit.
An alternative method to assess an mREIT’s worth is by looking at its Tangible Net Book Value (tNBV) per share, calculated by dividing the total value of its assets by the number of shares currently in circulation. It would be optimal for AGNC’s net spread and dollar roll income to increase concurrently with its tNBV. However, over the last year, both indicators have shown a decrease instead.
| Metric | Q1 2024 | Q2 2024 | Q3 2024 | Q4 2024 | Q1 2025 |
|---|---|---|---|---|---|
| Net spread and dollar roll income per share | $0.58 | $0.53 | $0.43 | $0.37 | $0.44 |
| Tangible net book value per share | $8.84 | $8.40 | $8.82 | $8.41 | $8.25 |
Generally, AGNC experiences increased profitability when interest rates decrease due to lower borrowing costs associated with Treasury yields on acquiring more Mortgage-Backed Securities (MBSes). However, despite the Federal Reserve’s reduction in key interest rates over the past year, AGNC’s profits and book value have still decreased.
The Fed’s rate cuts caused MBS yields to decrease, but the reduction in borrowing costs for purchasing those MBS wasn’t immediate. Consequently, it had to borrow money at higher interest rates to purchase lower-yielding MBSes, which negatively impacted its profits. Additionally, falling interest rates led more homeowners to refinance their mortgages at lower rates, thereby decreasing the profitability of its own mortgage loans.
What will happen to AGNC over the next year?
Under continued pressure, experts predict that AGNC’s net spread and dollar roll income per share will decrease by 12% to $1.66 in 2025, followed by a further 2% drop to $1.63 in 2026. This still comfortably covers its forward annual dividend rate of $1.44 per share, but the stock might continue to face pressure if its MBS yields don’t align with Treasury yields and stabilize its profits. This ongoing pressure could potentially reduce its net asset value, lower its stock price, and counteract the benefits from its generous dividends.
If AGNC manages to meet analyst expectations and continues to trade at 5 times its projected future net spread and dollar roll income per share, its stock price may decrease to approximately $8 by early 2026. This suggests that AGNC’s stock might remain steady or even dip slightly more in the next 12 months, but its potential for decline is limited. Its reliable monthly dividend, coupled with these limitations, could make it an attractive option for income-focused investors, although rapid growth isn’t expected over the next year.
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2025-07-19 14:04