Get Paid Monthly by AGNC Stock
Most real estate investment trusts (REITs) took a beating within the high-interest-rate environment. That’s because higher interest rates drive up the cost of borrowing and cut into margins, which leads to reduced profits and free cash flow (FCF). And REITs need to borrow a lot of money to increase their respective portfolios.
Fortunately, the Federal Reserve has begun reducing its interest rates. That’s good news for REITs in general.
Not all REITs suffer in a high-interest-rate environment though. Mortgage REITS (mREITS) tend to do well in such an environment.
mREITS provide financing for income-producing real estate by purchasing or originating mortgages and mortgage-back securities (MBS), earning income from the interest.
That said, a lower-interest-rate environment is also good for mREITs.
Why?
Lower rates mean that more people will come in from the sidelines to get on the property ladder. Rates might be lower, but it can also mean more lending.
One mREIT that has been doing exceptionally well since November 2023 is AGNC Investment Corp (NASDAQ:AGNC).
What happened in November 2023?
Well, that’s when the Federal Reserve hinted that it was done raising interest rates, indicating that rates would eventually start coming down.
Since the start of November 2023, AGNC stock has been trending steadily higher, hitting a three-year high of $10.59 in September. That represents an 80% gain since early November 2023.
AGNC stock has given up some of those gains to short-term profit-taking, but it continues to perform well. It’s up nine percent in 2024 and 30.5% on an annual basis. The outlook for AGNC stock remains solid, with Wall Street analysts providing a 12-month share price range of $10.31 to $12.00 per share. This points to potential upside of 8.8% to 26.7%. The higher target of $12.00 per share would also put AGNC stock in record territory.
Chart courtesy of StockCharts.com
About AGNC Investment Corp
AGNC Investment is a REIT that invests primarily in RMBS. Now, MBS played a big role in the last financial crisis, so investors may feel a little nervous about mREITs like AGNC. However, it’s important to note that my focus pick today does not invest in all types of MBS.
Instead, AGNC Investment’s main focus is RMBS that are guaranteed by the Government National Mortgage Association (Ginnie Mae), Federal National Mortgage Association (Fannie Mae), or the Federal Home Loan Mortgage Corporation (Freddie Mac). (Source: “Q3 2024 Stockholder Presentation,” AGNC Investment Corp, October 22, 2024.)
The REIT’s $73.1-billion investment portfolio is comprised mainly of:
- $68.0-billion agency MBS
- $4.1-billion net forward purchases/(sales) of agency MBS in the “to-be-announced” market (TBA securities)
- $1.0-billion credit risk transfer (CRT) and non-agency securities and other mortgage credit investments
With principal and interest payments guaranteed by a U.S.-government-sponsored enterprise or a U.S. government agency, these securities can provide a predictable income stream to AGNC Investment.
It’s not a 100% guarantee, of course. The company is still susceptible to domestic and global factors, especially the Federal Reserve’s monetary policy, which has a direct impact on the Treasury and other fixed-income markets.
Monthly Payouts at $0.12 Per Unit Maintained
Because AGNC Investment is regulated as a REIT, it has to legally return at least 90% of its taxable profits to investors through dividends.
AGNC stock has a monthly dividend rate of $0.12 per share, or $1.44 on an annual basis, for a forward yield of 14.88%. (Source: “Dividends,” AGNC Investment Corp, last accessed November 12, 2024.)
As a point of interest, AGNC Investment was formed in May 2008 during the Great Financial Crisis. Since then, the REIT has navigated a myriad of market cycles, Black Swan events, and periods of macroeconomic volatility, producing exceptional long-term returns for stockholders.
Since then, AGNC stock has returned over $13.0 billion to shareholders through dividends. And reinvesting those dividend payments can really impact the long-term performance of AGNC units.
Since its May 2008 initial public offering, AGNC stock has returned total profits of 391%.
The Lowdown on AGNC Stock
AGNC Investment Corp is a great mortgage REIT that saw its share price and monthly dividend payout take a hit during the opening months of the pandemic and over the last two years, with the Fed raising rates 11 times since 2022.
But, with the interest rates coming down, the macro and microeconomic outlook for AGNC and other mortgage REITs remains robust.
The Fed announced an initial 50-basis-point rate cut in September and 25-basis-point cut in November. If history is any indicator, the Federal Reserve is expected to return the federal funds rate to a neutral level over the next 12 to 24 months.
This is typically accompanied by a steepening of the yield curve and growing demand for high-quality fixed-income instruments such as agency MBS.
While the path of financial markets is never perfectly linear and is often accompanied by periods of volatility, the outlook for agency MBS today is significantly better than it was in 2022 and 2023.
And that bodes well for the REIT, AGNC stock, and its monthly dividends.