AGNC Investment (NASDAQ: AGNC) has a huge 12.5% dividend yield right now. For comparison, the S&P 500 (SNPINDEX: ^GSPC) has a tiny 1.1% yield, and the average real estate investment trust (REIT) has a yield of 3.8%. But don’t rush to buy shares thinking that you’ve found a no-brainer income opportunity. There’s a lot more to understand here.
A traditional REIT generates income by leasing out physical properties. That’s a pretty simple business model to understand, and it generally provides reliable cash flows to support yields well above market rates. AGNC Investment doesn’t do this. It buys and sells bond-like securities created by pooling mortgages together. That’s very different, with AGNC operating more like a bond mutual fund than a traditional REIT.
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This changes the equation in an important way. While dividends are an important tool for AGNC Investment to return value to shareholders, management focuses on total return when evaluating the company’s historical performance. Total return assumes that dividends are reinvested.
If you’re a dividend investor trying to live off the income your portfolio generates, you will likely be disappointed by AGNC Investment. The dividend this REIT pays has been highly volatile over time and, in fact, has been trending lower for more than a decade. The stock price has followed the dividend down. That would have left investors with less income and less capital, which is probably not an ideal outcome for most dividend investors.
However, if you reinvested the dividends AGNC Investment has paid since its initial public offering (IPO), the story is completely different. As the chart above shows, on a total return basis, AGNC Investment has beaten the S&P 500 index since its IPO. The returns don’t line up with those of the S&P 500, suggesting that adding AGNC Investment to your portfolio could add a valuable diversification benefit, as well.
You have to keep your eyes focused clearly on your investment target when making financial decisions. If you are a dividend investor, AGNC Investment probably isn’t a good fit. If you are focused on total return, however, this mortgage REIT could be just what you need to help you get to the millionaire plateau.
