Real estate investment trusts (REITs) are designed to pass income on to investors in a tax-advantaged manner. So it is understandable that dividend investors pay a lot of attention to REIT dividends and yields. But every REIT shouldn’t be judged by its yield, and a perfect case in point is AGNC Investment(NASDAQ: AGNC), which has a huge 14.9% dividend yield. Here’s why income investors need to tread carefully with AGNC Investment.
Before getting into AGNC’s business, it pays to simply look at the mortgage real estate investment trust’s dividend history. As the chart below highlights very clearly, investors who were attracted to the lofty dividend yield on offer here have not added a reliable dividend stock to their portfolio. After a rapid increase in the size of the dividend (the orange line), it shifted gears and headed steadily lower.
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Not surprisingly, the stock price (the purple line) followed the dividend. First it rose and then it fell. What’s more notable here, however, is the blue line, which is the dividend yield. That line has remained elevated the entire time, which is a simple function of the dividend yield formula. However, that high yield means that AGNC has looked like a high-yield dividend stock even as it was offering less income and its share price was falling.
Income-focused investors buying AGNC Investment in the hopes of securing a reliable income stream would have been let down. Indeed, if an investor spent the dividends generated here they would have been left with less income and less capital. That’s a terrible outcome.
Image source: Getty Images.
The interesting thing about AGNC Investment is that it is up front about its performance goals. On its investor website, it describes its objective as “Favorable long-term stockholder returns with a substantial yield component.” This requires a little bit of parsing. A dividend investor might think of stockholder returns in terms of dividend yield, particularly given the highlight of “a substantial yield component” in the objective. But stockholder returns are normally looked at in terms of total return, which is a measure that assumes dividend reinvestment over time. That’s assuming dividend reinvestment allows dividend-paying investments to be compared to non-dividend paying investments.
Basically, AGNC Investment isn’t looking to provide shareholders with a large dividend yield, per se. It is looking to create a large total return over time. And it has achieved that feat, with the “performance” segment of its website happily reporting that its annualized total stock return since inception is around 10.8% per year versus 6.8% for financials, 5.3% for REITs, and 5% for mortgage REITs as a group. The disclosure rollover on the performance graphic notes that the figures presented assume dividend reinvestment.
All in, AGNC Investment is telling investors very clearly that it is not a yield investment. The dividend history clearly highlights that fact as well. If you are looking to live off of the income your portfolio generates, you will likely be unhappy with an investment in AGNC Investment. Even if the dividend were to rise at some point in the future, there’s always the very real risk that it will fall again. That’s just the way AGNC Investment works as a business and, just as important, not the way most dividend investors think about their portfolios.
All of this brings up the question of what type of investor should be buying AGNC Investment. Clearly not income investors. But if you are using an asset allocation model and are looking to add mortgage exposure to the mix, it could be a good fit. You just need to go in understanding that you’ll need to reinvest the dividends if you want to maximize your returns. Most dividend investors won’t fall into this category of investing, which is usually the purview of institutional investors like pension funds.
All in, AGNC Investment probably isn’t a great dividend stock, but that’s not what it is trying to be. That said, AGNC Investment is a fairly good total return vehicle for those looking to invest in the mortgage sector — which is exactly what the REIT is trying to achieve.
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Reuben Gregg Brewer 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.
