Is AGNC Investment Stock a Buy Now?

Key Points

• AGNC Investment is an ultra-high-yield mortgage REIT.

• There are good reasons to buy the stock right now.

• There are equally good reasons to avoid the stock.

• 10 stocks we like better than AGNC Investment Corp. ›

AGNC Investment (NASDAQ: AGNC) is an interesting stock because of the complexity of what it does. And that complexity bleeds into the way investors need to think about this ultra-high-yield mortgage real estate investment trust (REIT). For some investors, AGNC Investment will be a buy right now. For others it is a stock that will never make sense to buy, despite its huge yield. Here's what you need to know.

Why an investor might want to buy AGNC Investment right now

AGNC Investment is a mortgage REIT, which is a complex niche of the REIT sector. You could replicate what a property-owning REIT does, on a much smaller scale, with a rental property. Most investors simply couldn't do what a mortgage REIT does. To simplify, AGNC Investment buys mortgages that have been pooled together into bond-like securities.

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The mortgage securities AGNC Investment buys are impacted by a range of factors, including interest rates, housing market dynamics, and mortgage repayment rates. Management is really doing some hard work as it looks to earn more interest from its investments than its cost of capital. Over the long term, however, AGNC Investment has performed very well, with its total return comparing favorably to that of the S&P 500 index (SNPINDEX: ^GSPC).

More importantly, however, is the fact that AGNC Investment's total return profile looks materially different from the return profile of the S&P 500 index. This is a huge benefit for investors that are concerned about diversification, making AGNC Investment an appealing addition to an asset allocation model. If that's the type of investor you are, AGNC Investment could be an attractive buy right now.

AGNC Total Return Level data by YCharts

AGNC Investment isn't the best dividend stock

To this point the ultra-high 15%+ dividend yield hasn't been a direct part of the story. That's because the dividend's biggest role in total return is that it gets used to buy additional shares. If you don't reinvest the dividends here, instead using them to pay for living expenses, you are likely to be sorely disappointed with your investment in AGNC.

As the chart below highlights, the dividend can, at best, be described as volatile. In fact, it has been in a decade-long downtrend. And the stock price has been following it lower. Less income and less capital are not what most dividend investors are looking for. Most income-focused investors will be better off avoiding AGNC Investment for this reason.

AGNC data by YCharts

That doesn't mean AGNC Investment is a bad company. This dynamic is common in the mREIT space. The basic nature of mortgages helps explain it. When you make a mortgage payment you are paying interest and paying down a small portion of the principal. Both of those parts get distributed to AGNC Investment's shareholders as dividends. And, as such, the value of the portfolio, which is basically the value of the business, shrinks over time. Most dividend investors will be better off with businesses that can grow, thus increasing their dividend-paying capacity, over time.

There are reasons on both sides of the buy/sell equation

AGNC Investment is one of those companies that you really need to understand before you buy it, or you could end up sorely disappointed with your investment. That said, if you see it as an attractive total return vehicle, the potential for interest rate cuts in the future could be a catalyst for a rally. But even if that happens, it will still be a less-than-desirable stock for those that are trying to live off of the income they generate from their portfolios.

Should you invest $1,000 in AGNC Investment Corp. 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.