AGNC Investment: A Look into the Future of the Radiant Dividend Star

With an impressive preliminary yield of 15%, AGNC Investment consistently attracts the interest of income-oriented investors looking to secure additional income through dividends. A special highlight of the real estate investment trust (REIT) is the monthly dividend payment, which promises continuity and reliability. Since April 2020, AGNC has consistently maintained a distribution of $0.12 per month. However, the security has overcome several challenges in recent years—the company's stock price has fallen by about 44% over the past five years. Taking dividends into account, the total return in this period amounts to just 3%. Considering the market's robustness, this is not an outstanding performance. Despite the stagnation in recent years, the REIT could soon benefit from better times. What exactly is behind a mortgage REIT, and why have they faced difficulties recently? Before considering an investment in AGNC, it is advisable to examine the business operations more closely. AGNC is a mortgage REIT that invests in mortgage-backed securities secured by government or government-affiliated organizations like Fannie Mae and Freddie Mac. Put simply, the company holds a portfolio of mortgages. Since these are ultimately guaranteed by the government, they carry no default risk. AGNC generates its revenue by taking out short-term financing, usually in the form of repurchase agreements, and purchasing long-term MBS. The profit lies in the interest spread between the financing costs and the returns from the MBS investments. These revenues eventually flow back to investors as dividends. As short-term financing rates can fluctuate, mortgage REITs hedge these rates with proven hedging strategies, thus better aligning the duration of their MBS portfolios. Hedging has played a significant role in recent years, with a historically long inverted yield curve—which was recently normalized. In such a yield curve, short-term rates lie above long-term rates. Although AGNC's financing costs increased last year, the company was still able to maintain a healthy interest margin between financing costs and MBS yields. Through hedging, financing costs were reduced by 2.9% in the last quarter. Without this hedging, the portfolio’s returns would have been lower than the financing costs.