Could Buying Ultra High-Yield AGNC Investment Stock Today Set You Up for Life?

AGNC Investment (NASDAQ: AGNC) has done a fairly good job of meeting its long-term business goals. The problem for investors is perception, because the stock's 14% dividend yield can obscure how the stock is viewed. Here's why AGNC Investment, despite its huge yield, may not set you up for life if you are a dividend investor.

What does AGNC Investment do?

AGNC Investment is a real estate investment trust (REIT). The conventional view of REITs is that they are designed to generate a reliable income stream for investors. A great example of how reliable REITs can be at paying dividends comes from Federal Realty (NYSE: FRT), a Dividend King. Essentially, the strip mall and mixed-use landlord has increased its dividend annually for more than 50 consecutive years.

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Add in a 4.5% dividend yield, and Federal Realty could be an attractive stock for a dividend-focused investor. Federal Realty has the longest dividend streak of any REIT, so it is a cherry-picked example of success. Still, more aggressive investors might argue that a REIT with a 14% yield would be even more attractive.

There's an important distinction. Federal Realty is a property owning REIT, while AGNC Investment is a mortgage REIT. The mREIT space is a specialized niche within the broader REIT sector, operating in a distinct manner. While Federal Realty manages a portfolio of physical properties, AGNC manages a portfolio of mortgages that have been pooled into bond-like securities. In many ways, it operates more like a mutual fund, buying and selling the mortgage securities it owns.

The company's goal is to generate higher returns from its investments in mortgage securities, primarily through interest payments, than it costs to operate the business. The major expenses are employee costs and interest, some of which are derived from loans backed by its portfolio of mortgage securities. AGNC is way more complex than a REIT that buys a property and leases it out to a tenant. You probably shouldn't buy AGNC if you aren't willing to do a little extra legwork as an investor.

The real problem with AGNC's dividend

If you go to AGNC's investor website, you'll see its objective clearly spelled out: "Favorable long-term stockholder returns with a substantial yield component." The goal is not to pay a high yield; it is to generate strong returns. In other words, AGNC Investment is really focused on total return, which assumes the reinvestment of dividends.

Management has done a solid job of achieving its total return goal, as shown in the chart below. However, while the orange line (total return) is compelling, the purple (share price) and blue lines (dividend) are a little troubling.

AGNC data by YCharts

Not only is the dividend highly volatile, but it has been trending lower for years. The stock price, meanwhile, has trended along with the dividend over time. If you spent the dividends you collected from AGNC instead of reinvesting them, you would now be generating less income and have seen a material decline in your capital. Most dividend investors are seeking companies that pay sustainable, if not growing, dividends.

The problem with AGNC isn't the company's objective. Total return is a completely valid and acceptable goal. The problem is that the "substantial yield component" involved in reaching that goal leads investors to view the stock as a dividend stock.

What can AGNC Investment set you up for?

If you buy AGNC Investment thinking you've set yourself up for a lifetime of reliable income, you have probably set yourself up for disappointment. If you buy it with the goal of adding a bit of diversification to a portfolio centered around total return, however, it could be a solid option for you. At the end of the day, the key is to ensure you understand what you are buying with AGNC.

Reuben Gregg Brewer has positions in Federal Realty Investment Trust. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.