Month-to-month Dividend Inventory In Focus: AGNC Funding Corp.

Up to date on Might 18th, 2023 by Bob Ciura

AGNC Funding Corp (AGNC) has a particularly excessive dividend yield of 15.6%. When it comes to present dividend yield, AGNC is close to the very prime of our record of high-yield dividend shares.

As well as, AGNC pays its dividend every month, reasonably than on a quarterly or semi-annual foundation. Month-to-month dividends give buyers the power to compound dividends even sooner.

There are 84 month-to-month dividend shares in our database. You possibly can obtain our full Excel spreadsheet of all month-to-month dividend shares (together with metrics that matter like dividend yields and payout ratios) by clicking on the hyperlink beneath:

That mentioned, additionally it is vital for buyers to evaluate the sustainability of such a excessive dividend yield, as yields in extra of 10% are sometimes an indication of elementary challenges going through the enterprise. Double-digit dividend yields typically sign that buyers don’t imagine the dividend is sustainable, and are pricing the inventory in anticipation of a reduce to the dividend.

This text will focus on AGNC’s enterprise mannequin, and whether or not the inventory is interesting to earnings buyers.

Enterprise Overview

AGNC was based in 2008 and is an internally-managed REIT. Whereas most REITs personal bodily properties which are leased to tenants, AGNC has a unique enterprise mannequin. It operates in a distinct segment of the REIT market: mortgage securities.

AGNC invests in company mortgage-backed securities. It generates earnings by accumulating curiosity on its invested property, minus borrowing prices. It additionally data good points or losses from its investments and hedging practices. Company securities are people who have principal and curiosity funds assured by both a government-sponsored entity, or the federal government itself. They theoretically carry much less threat than personal mortgages.

The belief employs important quantities of leverage to spend money on these securities with the intention to enhance its potential to generate curiosity earnings. AGNC borrows totally on a collateralized foundation via securities structured as repurchase agreements.

The belief’s acknowledged purpose is to construct worth by way of a mixture of month-to-month dividends and internet asset worth accretion. AGNC has achieved properly with its dividends over time, however internet asset worth creation has typically confirmed elusive.

Certainly, the belief has paid roughly $45 of complete dividends per share since its IPO; the share worth right now is simply over $9. That kind of monitor document is extraordinary and is why some buyers are drawn to the inventory. In different phrases, the belief has distributed money per-share to shareholders of about 4 occasions the present worth of the inventory.

AGNC reported its Q1 2023 outcomes on April twenty fourth, 2023.

Supply: Investor Presentation

AGNC reported reporting a complete lack of $(0.07) per widespread share, together with a internet lack of $(0.31) per widespread share and $0.70 internet unfold and greenback roll earnings per widespread share. The corporate additionally declared $0.36 dividends per widespread share for the quarter.

The funding portfolio as of March 31, 2023, was $56.8 billion, and the tangible internet e book worth per widespread share was $9.41. AGNC issued 17.1 million widespread shares via At-the-Market choices, elevating $171 million.

Progress Prospects

The main disadvantage to mortgage REITs is that the enterprise mannequin is negatively impacted by rising rates of interest. AGNC makes cash by borrowing at short-term charges, lending at long-term charges, and pocketing the distinction. To amplify returns, mortgage REITs are additionally extremely leveraged. It’s common for mortgage REITs to have leverage charges of 5X or extra as a result of spreads on these securities are typically fairly tight.

In a rising interest-rate atmosphere, mortgage REITs usually see the worth of their investments diminished. And, larger charges normally trigger their curiosity margins to contract because the fee obtained is fastened normally, however borrowing prices are variable. This double-impact is what buyers skilled most lately in 2018 when spreads contracted and e book worth fell.

Nevertheless, as rates of interest as soon as once more fell beginning in 2019, AGNC noticed the profit as its spreads stabilized as properly, permitting it to provide financial earnings.

Rates of interest are as soon as once more again on the rise, as central banks all over the world have aggressively hiked charges in an try to scale back inflation. The belief’s e book worth contracted in current quarters on account of these strikes in rates of interest.

General, the excessive payout ratio and the unstable nature of the enterprise mannequin will hurt earnings-per-share progress. We additionally imagine that dividfinish progress shall be anemic for the foreseeable future.

Dividend Evaluation

AGNC has declared month-to-month dividends of $0.12 per share since April 2020. This implies AGNC has an annualized payout of $1.44 per share, which equals a particularly excessive present yield of 16.6% based mostly on the present share worth.

Supply: Investor Presentation

Excessive yields generally is a signal of elevated threat. And, AGNC’s dividend does carry important threat. AGNC has diminished its dividend a number of occasions over the previous decade, together with dividend cuts in 2020 and in 2021.

We don’t see a dividend reduce as an imminent threat at this level on condition that the payout was pretty lately reduce to account for unfavorable rate of interest actions and that AGNC’s internet asset worth seems to have stabilized. Administration has taken the mandatory steps to guard its curiosity earnings, so we don’t see one other dividend reduce within the close to time period.

In reality, we see the payout ratio remaining beneath 75% of earnings for the foreseeable future. If that’s the case, there could be no purpose to chop the payout.

Nevertheless, with any mortgage REIT, there may be at all times a major threat to the payout, and that’s one thing buyers ought to take note, notably given the unstable conduct of rates of interest lately.

Last Ideas

Excessive-yield month-to-month dividend paying shares are extraordinarily enticing for earnings buyers, a minimum of on the floor. That is notably true in an atmosphere of low rates of interest, as different sources of earnings usually have a lot decrease yields. AGNC pays a hefty yield of 15.6% proper now, which could be very excessive by any commonplace.

We imagine the REIT’s excessive yield to be secure for the close to future, however that is hardly a low-risk scenario given the corporate’s enterprise mannequin and interest-rate sensitivity. Whereas AGNC ought to proceed to pay a dividend yield many occasions larger than the S&P 500 Index common, it’s not a horny possibility for risk-averse earnings buyers.

Don’t miss the sources beneath for extra month-to-month dividend inventory investing analysis.

And see the sources beneath for extra compelling funding concepts for dividend progress shares and/or high-yield funding securities.