Courtney Carlsen, The Motley Fool
6 min read
In This Article:
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AGNC Investment has a dividend yield of more than 15%, making it appealing for some income-focused investors.
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The mortgage real estate investment trust struggled in recent years as short-term borrowing costs exceeded the yield on its longer-term holdings.
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Declining rates and a normalizing yield curve could boost its margins and book value.
AGNC Investment Corp. (NASDAQ: AGNC) appears to be an attractive investment option for those seeking a robust income stream, thanks to its impressive dividend yield of 15.6%. Its high yield stands out especially for investors seeking to generate passive income from their holdings.
In recent years, AGNC has faced challenges, primarily due to the rising interest rates. While the stock has underperformed, there is potential for recovery and improved performance as market conditions evolve. However, before you invest in AGNC for its high yield, consider these points first.
AGNC Investment is an attractive option for investors seeking exposure to the residential real estate market without directly purchasing properties. As a mortgage real estate investment trust (mREIT), AGNC focuses on purchasing mortgage-backed securities (MBS), which are bundles of home loans sold to investors.
AGNC takes a conservative approach by investing primarily in mortgages backed by government-sponsored enterprises, such as the Federal National Mortgage Association (commonly known as Fannie Mae) and the Federal Home Loan Mortgage Corporation (often referred to as Freddie Mac).
One of the most appealing features of AGNC is its ultra-high dividend yield. You may wonder how a company can offer such a high dividend when current mortgage rates are lower than this.
The answer lies in AGNC's use of leverage. AGNC utilizes instruments such as repurchase agreements and short-term debt to finance its investments in ABSs, which usually have longer maturities. These arrangements enable AGNC to borrow money at relatively low interest rates because they have a repayment timeline of one year or less.
AGNC's use of leverage can indeed amplify profits, but it also exposes the company to risks, particularly fluctuations in interest rates. To visualize this, consider the yield curve, a graphic representation that shows the interest rates of bonds of similar quality across different time frames.
AGNC performs best when short-term interest rates are lower than the long-term rates it earns on its MBS investments. That's because it can borrow at lower interest rates on a short-term basis and invest those funds in higher-yielding MBS.
