Why Is AGNC's Dividend High?

December 07, 2022

Not all real estate investment trusts (REITs) are the same, a fact that's particularly important to remember when you venture into the mortgage REIT sector. Indeed, when investors see AGNC Investment's (AGNC -1.32%) huge 14% dividend yield, they need to consider a lot more than just the big dividend checks. Here's why AGNC's yield is so high and why conservative dividend investors may not want to buy it.

Properties versus mortgages

When most people think of a REIT, they probably conjure up a physical property, like an apartment building, strip mall, or office building. In general, owning such assets is a pretty stable business as the landlord gets to collect regular rent checks. The income generated is passed on to investors via well-supported dividends. There are a lot of well-run REITs with incredible dividend histories out there, including Federal Realty Investment Trust (FRT -0.26%), which has increased its dividend annually for more than five decades! (That's the longest streak in the REIT sector.)

AGNC Investment, however, doesn't own physical properties. It owns mortgages. That's very different, particularly because a lot of what the company owns are actually collateralized mortgage obligation, or CMOs. CMOs are collections of mortgages that have been put together into something that resembles a bond. The CMOs can be traded, and so their values tend to fluctuate more than the price of a physical property might. And then there's the issue of interest rates, which also change the value that the market will assign to a CMO. Thus, there's more risk in AGNC's business model, in general, than you would likely be exposed to if you owned strip mall landlord, and Dividend King, Federal Realty.

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