Are Mortgage REITs Income Machines or Capital Destroyers? Here's How to Tell the Difference.

It might seem shocking, but AGNC Investment (NASDAQ: AGNC) has a 12% dividend yield. In fact, if you look back at the stock's history, the yield has been above 10% for most of the company's public existence. Given that investors generally expect a 10% return over time from the market, AGNC Investment's yield looks almost too good to be true. And it could be, depending on how you use it. Here's what you need to know before you buy AGNC Investment or any other mortgage real estate investment trust (REIT).

You need to understand what you are buying

AGNC Investment is a well-respected mREIT. In fact, if you look back at the history here, the stock has provided pretty impressive total returns. Since its initial public offering, its total return is a hair better than that of the S&P 500 index (SNPINDEX: ^GSPC). Beating the S&P 500 is no small feat, but total return requires reinvesting dividends.

Image source: Getty Images.

So if you are focused on total return, AGNC Investment could be a good fit for your portfolio. But if you need the dividends to pay for living expenses, you'll have an entirely different view of the situation. As the graph below shows, the dividend has been trending lower for more than a decade. And the stock price has followed the dividend as it has fallen. This isn't an unusual chart for a mortgage REIT.

AGNC data by YCharts

The dividend yield remains high because the price falls along with the dividend. So, if you spend the dividend, you risk being left with less income and less capital, which is not what most dividend investors are trying to achieve. In this case, an mREIT ends up being a capital destroyer.

Focus on the big picture with mREITs

As noted, AGNC is a well-respected mREIT. There are nuances to the business model that could make an mREIT attractive over short periods, even for income-focused investors. Right now, however, that's not the case. The rising rates today put downward pressure on the value of an mREIT's portfolio and increase borrowing costs, thereby pressuring earnings. Notably, the Federal Reserve doesn't seem particularly bothered by the rising-rate environment, given elevated inflation rates, so rate cuts don't seem likely at this point. If you are looking to create a reliable, long-term income stream to pay your bills, mREITs, even well-run ones, are probably best avoided.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.