Is AGNC Investment Stock a Buy Now?

AGNC Investment (NASDAQ: AGNC) always seems to pop up on screens for high-yield stocks. In fact, the mortgage real estate investment trust (REIT) has had a dividend yield above 10% for the vast majority of its existence.

That sounds enticing, but there are important nuances here. Before you buy this stock, you need to have a deeper understanding of what it does and why.

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What does AGNC Investment do?

As noted, AGNC Investment is a mortgage REIT, a subsector of the REIT category that operates in a completely different fashion from property-owning REITs.

A property-owning REIT buys physical properties and leases them out to tenants, which is easy to understand because it is what you would do with a rental property. A mortgage REIT like AGNC buys mortgages that have been pooled together into bond-like securities. In many ways, mortgage REITs are more like mutual funds than operating companies.

Image source: Getty Images.

Essentially, the value of AGNC is the value of its mortgage securities portfolio. These bond-like investments trade all day long and are affected by interest rates, property market trends, and mortgage repayment trends, among other factors. The REIT is simply trying to make the difference between the interest it earns and its costs, which notably includes the interest costs associated with leverage. There are a lot of moving parts, and it would be difficult for an investor to closely track what is going on inside of AGNC.

It is a fairly complex business, and the real problem here comes from an odd dichotomy. AGNC has a massive 15%-plus dividend yield right now, which leads many investors to view it as an income investment. But the company clearly states that its goal is total return. And total return assumes dividend reinvestment.

Dividend reinvestment is the key to success with AGNC

This is where understanding what you own becomes vital. The company lives up to its goal of producing good total returns over time. As the chart below highlights, this mortgage REIT has largely kept pace with the total return of the S&P 500 index (SNPINDEX: ^GSPC) since its inception.

In fact, over some periods, AGNC has strongly outperformed the S&P 500. If it was included as part of a diversified asset allocation model, an investor would likely be pleased with this selection.

AGNC Total Return Price data by YCharts.

But the high yield might lure in a different kind of investor. If you were seeking to use the dividends AGNC Investment generated to pay for living expenses, the story here would be vastly different. As the chart below shows, the dividend spiked early in the REIT's life (which is normal for new REITs). But then it started a long trend lower. And the share price followed the dividend down.

AGNC data by YCharts.

An investor buying the stock with the intent of using the dividend to pay for living expenses would have been left with less income and less capital. That's not what most dividend investors are likely to be looking to achieve.

To be fair, the dividends are so large here that the company has paid out more in dividends than it has lost in value. So, technically, a dividend investor would be a net winner. But most income investors probably wouldn't see that outcome as a success. The preference for dividend investors is far more likely to be a stable to growing share price and a stable to growing dividend.

AGNC Investment is fine if you know what you are buying

In the end, the REIT is not a bad investment ... it's a complicated one. If you are trying to build a portfolio around an asset allocation model, it could be a good fit for total return.

If you are trying to build a portfolio that will provide you with reliable income to use for paying bills, well, AGNC Investment will likely be a bad choice for you. In other words, most dividend investors shouldn't buy it right now.

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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.