"AGNC: Buy, Sell, or Hold?"

AGNC Investment Corp. (AGNC) has been a hot topic among investors, especially those seeking high dividend yields. With a forward dividend yield of 14.3% as of March 18, 2025, AGNC stands out as one of the market's highest-yielding stocks. But is this yield sustainable, or is it a high-yield trap? Let's dive into AGNC's business model to see if it's a viable income investment or a risky bet.

The Business Model: A Deep Dive

AGNC is a mortgage real estate investment trust (mREIT) that focuses on agency mortgage-backed securities (MBS). Unlike traditional REITs, which buy properties and rent them out, AGNC originates its own mortgages and purchases MBS to generate interest income. This unique business model allows AGNC to pay out at least 90% of its pre-tax net income to maintain a favorable tax rate.

AGNC's income comes from two main sources: the net spread and dollar roll income. The net spread is the yield earned on its mortgages and MBS minus the costs of funding those assets. Dollar roll income is generated by selling to-be-announced (TBA) MBS for delivery in the current month while simultaneously agreeing to buy a similar MBS in a future month. Rising interest rates generally boost both of these figures, but over the past year, AGNC's net spread and dollar roll income per share, along with its tangible net book value per share, dipped as interest rates fell.

The Numbers: A Closer Look

Let's take a look at the numbers to understand AGNC's performance better. In 2024, AGNC's net spread and dollar roll income dropped 28% to $1.88 per share as the Federal Reserve cut its benchmark interest rates three times. Despite this drop, the income still comfortably covered its $1.44 in dividends per share. For 2025, analysts expect AGNC's net spread and dollar roll income to decline 15% to $1.60 per share as interest rates keep dropping. This will still cover its forward dividend of $1.44 per share, but investors might be wary of bigger rate cuts.



The Risks: What Could Go Wrong?

AGNC's business model might seem risky, but it allocates 89.4% of its $73.3 billion portfolio to Agency MBS assets, which are backed by Fannie Mae, Freddie Mac, or Ginnie Mae. This firm government support should shield it from a major mortgage crisis. Its riskier new TBA mortgages only account for 9.4% of its portfolio.

However, AGNC's high dividend yield comes with significant risks. The company's profitability is highly sensitive to changes in interest rates. Rising interest rates can increase borrowing costs, compressing the net interest spread. For instance, in 2023, AGNC's net income was $1.2 billion, but it faced potential compression during high-rate environments.



The Outlook: What's Next for AGNC?

AGNC's CEO, Peter Federico, has expressed a "very positive outlook for Agency MBS" in 2025, noting that the Fed has "finally shifted its restrictive monetary policy stance and begun the process of returning short-term rates to a neutral level." This suggests that AGNC prefers a slower rate cut scenario, which could cushion the blow and enable the company to support its high dividend yield.

The Verdict: Buy, Sell, or Hold?

AGNC's 14.3% dividend looks sustainable for now, but investors should closely monitor interest rates and see how they affect the mortgage market. If interest rates spike or drop too quickly, AGNC could lose its balance and be forced to slash its high dividends. That said, AGNC's high yield and low valuation should limit its downside potential, making it a potential buy for income-focused investors willing to take on the risks.

In conclusion, agnc investment corp. offers a compelling investment opportunity for those seeking high dividend yields. However, it's crucial to understand the risks and closely monitor interest rate movements. AGNC's business model, portfolio composition, and management expertise provide a solid foundation, but the company's sensitivity to interest rate fluctuations means that investors should tread carefully.

Ask Aime: "Is AGNC Investment Corp.'s high dividend yield sustainable, or is it a high-yield trap?"