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Sometimes it can be hard for a dividend investor to look past a huge yield to really see the business behind it. That's especially true if the dividend has been consistently paid for a long time.
This is the problem with AGNC Investment (NASDAQ: AGNC) and its 17% dividend yield. If you need a reliable income stream to ensure you can pay your bills, this mortgage real estate investment trust (REIT) probably won't be for you. Here's why.
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What does AGNC Investment do?
The first thing that is important to understand is that AGNC Investment has actually achieved its goals fairly well over time. It isn't a bad company by any stretch of the imagination.
The main goal of this mortgage REIT, however, is total return, not dividends. Dividends are a component of total return, of course, but total return requires the dividends to be reinvested. The company's exact wording is "Favorable long-term stockholder returns with a substantial yield component."
That sounds like it would be enticing, but it is not the same thing as providing a reliable and growing dividend. Having total return as a goal actually makes sense, however, when you examine AGNC's approach to the mortgage REIT market.
It simply buys mortgages that have been pooled into bond-like securities. It earns the differences between the interest it collects on these mortgage securities and its investment costs, which notably include the costs of debt since it uses leverage in an effort to enhance returns. This model is more like a mutual fund than an operating company.
The proof is in the charts
It doesn't require a huge amount of digging to see why AGNC probably won't be a good fit for dividend investors despite its shockingly large yield. It just requires looking back to what the company has done with its dividend since it went public.
Notice that the dividend rocketed higher at the start of the graph. This isn't surprising to see for a new REIT. The problem is that, after its peak, the dividend has headed lower.
That trend has been going on for more than a decade. To be fair, management has maintained the dividend at its current level since the last cut in 2020. But there is a very clear downward trend when you look further back.
At the very least, an investor should come away from AGNC's dividend history with the view that the payout isn't particularly reliable. The unfortunate fact is that dividend cuts are pretty normal in the mortgage REIT sector and AGNC Investment isn't an outlier. However, the huge dividend yield is likely to tempt anyone trying to maximize the income they generate from their portfolio.