With its enticing high dividend yield of 14.3%, AGNC Investment Corporation (NASDAQ: AGNC) stands out as an intriguing choice for income-focused investors. The company pays out monthly dividends and is among the highest-yielding stocks available to investors today.
While AGNC offers impressive dividends, its overall performance has been less than stellar in recent years. However, if interest rates stabilize, AGNC could find itself in a position to boost its share price. If you’re contemplating an investment in AGNC today for passive income, there are a few things you should understand first.
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What AGNC Investment does
AGNC Investment Corp. is a unique company for those interested in residential real estate exposure. It operates as a mortgage real estate investment trust (mREIT) specializing in buying mortgage-backed securities (MBS), or bundles of home loans pooled together and sold to investors. AGNC’s securities are generally safe, as they are backed by government-sponsored entities like the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).
One of the appealing aspects of investing in AGNC is its high dividend. However, mortgage-backed securities don’t yield the high returns AGNC pays out, so how is it possible? One word: Leverage.
AGNC borrows money to invest more than it can by using its own funds. It employs strategies like repurchase agreements and short-term debt agreements. These loans are generally repaid within a year (or sooner). Although this strategy can boost returns, it also introduces risk.
Reasons to sell AGNC
Investing in AGNC can be complicated and may expose investors to more interest rate risk than they like. At its core, AGNC borrows money in the short term and invests in longer-term MBS. This makes AGNC highly sensitive to interest rate changes, which can significantly affect both the costs of borrowing and the value of its investments.
From 2010 to early 2020, the stock delivered solid returns of about 10.5% annually, factoring in the effect of reinvesting its high dividend payouts. However, this period was notable for interest rates, which were around their lowest level in decades. AGNC benefited from low short-term borrowing costs while investing in higher-yielding mortgages while interest rates remained steady.
However, these past few years have seen the return of inflationary pressures in the economy for the first time in over four decades. As a result, the Federal Reserve began raising the federal funds rate, which determines the short-term rate for banks lending overnight and has ripple effects across other interest rate assets. From the beginning of 2022 (before the Fed began raising rates) through today, AGNC has returned a meager 1.6% annually.
AGNC Total Return Level data by YCharts.
Since 2021, AGNC’s interest income has risen from $1.4 billion to $2.9 billion. However, borrowing costs have exploded as well. As a result, interest expense has gone from $75 million to $2.9 billion over that same period. In 2023, interest expense exceeded interest income. Last year, these two amounts were roughly the same.
Rising interest rates have also weighed on AGNC’s book value. From 2021 to 2024, AGNC’s tangible net book value per share fell 46% to $8.41.
Investors who don’t want exposure to fluctuations in interest rates, which significantly affect AGNC’s business, may want to avoid the stock despite its appealing high dividend yield.
Reasons to buy or hold
Although the past few years have been difficult for AGNC, things are improving. For one, the company has been able to invest in higher-yielding MBS. Last year, the yield on its MBS portfolio rose to 4.77%, up from 4.41% one year ago.
AGNC is also well-positioned to benefit from declining short-term interest rates. Last year, market participants expected numerous interest rate cuts in 2025. However, sticky inflation and an uncertain operating and macroeconomic environment have pushed back interest rate cut expectations. Currently, CME Group projects three interest rate cuts of 25 basis points through the end of the year.
Falling short-term interest rates would positively benefit AGNC’s short-term borrowing costs. The company could also see its book value improve, which could bode well for its stock price.
Image source: Getty Images.
Final verdict
AGNC Investment is a high-yield dividend stock that looks appealing at first glance. Since 2010, the stock’s average annualized return has been 7.3% (including reinvested dividends), which includes periods of falling and rising interest rates. However, the company has struggled more recently amid higher interest rates.
If you believe interest rates are stabilizing and shorter-term rates will come down, AGNC could be a good play for a rebound as its net book value and net interest income improve. Short-term investors may like the stock for a bounce.
However, this stock is far from a sure thing and exposes investors to more interest rate risk than they would like to have. For that reason, I think longer-term investors seeking a buy-and-hold stock for passive income are better off searching elsewhere.
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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.