Where Will AGNC Investment Stock Be in 1 Year?

In 2022 and 2023, many dividend stocks withered as rising interest rates drove more investors toward risk-free CDs and T-bills. But over the past year, many of those dividend stocks warmed up again as interest rates declined.

With the Federal Reserve penciling in at least two more rate cuts in 2025, there could be even more income investors buying the market's high-yielding dividend stocks. However, investors should be wary of stocks with unusually high yields -- since those high dividends might be unsustainable and mask a company's underlying problems.

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One of those divisive stocks is AGNC Investment (AGNC -1.02%), a real estate investment trust (REIT) that pays a whopping forward dividend yield of 15.5%. The bulls believe its high dividend is safe and sustainable, while the bears will point out that its business model is messy and that it's underperformed many of its lower-yielding peers. Let's review both arguments and see where AGNC's stock might be headed in a year.

Understanding AGNC's business model

Many REITs simply buy properties, rent them out, and split the rental income with their investors. However, AGNC is a mortgage REIT (mREIT), which doesn't purchase any properties. It only originates its own mortgages and buys mortgage-backed securities (MBSes), and it books the interest from those mortgages and MBSes as its net profits.

Like traditional REITs, mREITs must distribute at least 90% of their taxable earnings as dividends to maintain a favorable tax rate. But unlike traditional REITs, mREITs are exposed to a wider range of interest rate, prepayment, credit, and rollover risks.

In a low interest rate environment, mREITs generate less interest income. Borrowers could also refinance their existing loans at lower rates or sell their properties too quickly. But in a high interest rate environment, the market's demand for new mortgages could dry up. Borrowers also usually borrow money at lower short-term rates than higher long-term rates, so an inversion of the yield curve (when short-term rates rise higher than long-term rates) in an unstable economic environment could prevent them from consistently "rolling over" their loans at more attractive interest rates as they mature.

In other words, mREITs need interest rates to remain elevated but stable to generate consistent profits. By comparison, traditional REITs flourish when interest rates are low, since it's easier to buy new properties and attract new tenants.

AGNC allocates 93% of its portfolio to agency MBS assets, which are backed by Fannie Mae, Freddie Mac, or Ginnie Mae to offset the risk of another mortgage crisis. AGNC says that government support "substantially eliminates credit risk and protects us in the event borrowers default on their mortgage payments."

It also holds an exclusive "captive" broker-dealer deal with Bethesda Securities -- a member of the Fixed Income Clearing Corporation (FICC) and the Financial Industry Regulatory Authority (FINRA) -- that grants it access to lower wholesale funding rates and lower collateral requirements than other mREITs that work with independent broker-dealers.

What happened to AGNC over the past year?

AGNC's net spread and dollar roll income per share, its core metric for gauging its profits, declined over the past year as the mortgage market stayed chilly and the Fed cut interest rates at a slower-than-expected rate. However, its tangible net book value per share grew year over year as the value of its underlying investments grew.

Data source: AGNC.

Yet the forces contributing to the decline in spreads and income could dissipate over the next year. The two-year yield curve inversion, which reduced the spread between the interest AGNC earned from mortgages and the interest it pays on its own loans, finally ended last September.

The Fed's upcoming interest rate cuts should generate more tailwinds for the real estate market, even if they're implemented at a slower-than-expected rate. AGNC has also been gradually increasing its portfolio's exposure to riskier non-agency assets to boost its near-term profits. As for its hefty dividend, it's maintained a stable monthly payout of $0.12 per share for nearly five consecutive years -- but it doesn't consistently raise its dividend every year.

What will happen to AGNC over the next year?

AGNC trades at $9.30 as of this writing, which makes it look cheap at just 1.05 times its latest tangible net book value per share. Its high yield, low valuation, and expectations for lower rates should limit its downside potential over the next 12 months.

That makes it an attractive short-term alternative to lower-yielding CDs, T-bills, and traditional REITs like Realty Income in 2025. But investors should recall that AGNC's shares actually declined by nearly 50% over the past five years as it grappled with the pandemic, rising rates, and other macro challenges -- and it delivered a dismal negative total return of 3% even after including its reinvested dividends. So while AGNC's stock might head a bit higher in a year, I'm not confident it will stay ahead of the market or its more balanced REIT peers over the long run.