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

Up to date on December ninth, 2022 by Josh Arnold

AGNC Funding Corp (AGNC) has an especially excessive dividend yield of 14.9%, which is one thing this inventory is actually identified for. By way of present dividend yield, AGNC is close to the very high of our record of high-yield dividend stocks, notably given its measurement.

As well as, AGNC pays its dividend every month, relatively than on a quarterly or semi-annual foundation, as is the case with most dividend shares.

Month-to-month dividends give buyers the power to compound dividends even quicker. There should not many monthly dividend stocks, as the executive burden on the businesses paying the dividends is larger than paying quarterly, for instance.

Certainly, there are solely 49 shares that presently pay month-to-month dividends. 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 under:


That mentioned, additionally it is essential for buyers to evaluate the sustainability of such a excessive dividend yield, as yields in extra of 10% are sometimes an indication of basic challenges dealing with the enterprise. Double-digit dividend yields usually sign that buyers don’t imagine the dividend is sustainable, and are pricing the inventory in anticipation of a minimize 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 might be leased to tenants, AGNC has a special 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 gathering curiosity on its invested property, minus borrowing prices. It additionally information good points or losses from its investments and hedging practices. Company securities are those 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 so as to enhance its skill to generate curiosity earnings. AGNC borrows totally on a collateralized foundation via securities structured as repurchase agreements.

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

Certainly, the belief has paid greater than $44 of complete dividends per share since its IPO; the share value at present is slightly below $10. 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 greater than 4 instances the present worth of the inventory.

AGNC reported its Q3 2022 outcomes on October twenty fifth, 2022. Tangible guide worth per share was down from $11.43 within the June quarter to $9.08 on the finish of September. Financial return of tangible widespread fairness was -17.4%, versus -10.1% within the second quarter.

Web unfold and greenback roll earnings per share was 84 cents, which was up from 83 cents within the earlier quarter, and beat estimates of 69 cents. Annualized internet curiosity unfold was 2.81%, up from 2.70% in Q2. Money and unencumbered company MBS was $3.6 billion on the finish of Q3, up from $2.8 billion in Q2. The belief’s weighted common yield on its portfolio was 9.2%, down from 12.4% within the second quarter.

A extra detailed breakdown of AGNC’s third quarter will be seen within the picture under:

Supply: Investor Presentation

Following Q3 outcomes, the inventory is buying and selling at a roughly 7% premium to tangible internet guide worth per share.

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 sometimes see the worth of their investments lowered. And, larger charges often trigger their curiosity margins to contract because the cost acquired is fastened typically, however borrowing prices are variable. This double-impact is what buyers skilled most lately in 2018 when spreads contracted and guide worth fell.

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

Rates of interest are as soon as once more again on the rise, as central banks world wide have aggressively hiked charges in an try to scale back inflation. The belief’s guide worth contracted in current quarters on account of these strikes in rates of interest, with the sharp decline in Q3 the direct results of this atmosphere.

General, the excessive payout ratio and the unstable nature of the enterprise mannequin will hurt earnings-per-share development. We additionally imagine that dividfinish development will likely 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 an especially excessive present yield of 14.9% based mostly on the present share value, which has been very weak in current months as charges have risen.

Supply: Investor Presentation

Excessive yields could be a signal of elevated threat. And, AGNC’s dividend does carry important threat. AGNC has lowered its dividend a number of instances over the previous decade, together with dividend cuts in 2020 and in 2021.

We don’t see a dividend minimize as an imminent threat at this level on condition that the payout was pretty lately minimize 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 minimize within the close to time period. In truth, we see the payout ratio remaining under 75% of earnings for the foreseeable future. If that’s the case, there could be no cause to chop the payout as AGNC can presently fairly simply afford its dividend.

Nonetheless, with any mortgage REIT, there’s at all times a big threat to the payout, and that’s one thing buyers ought to be mindful, notably given the unstable conduct of rates of interest in recent times.

Remaining Ideas

Excessive-yield month-to-month dividend paying shares are extraordinarily enticing for earnings buyers, at the least on the floor. That is notably true in an atmosphere of low rates of interest, as various sources of earnings typically have a lot decrease yields. AGNC pays a hefty yield of 14.9% proper now, which could be very excessive by any commonplace.

We imagine the REIT’s high 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 instances larger than the S&P 500 Index common, it isn’t a sexy possibility for risk-averse earnings buyers.

In case you are excited by discovering extra high-quality dividend development shares appropriate for long-term funding, the next Certain Dividend databases will likely be helpful:

The main home inventory market indices are one other stable useful resource for locating funding concepts. Certain Dividend compiles the next inventory market databases and updates them month-to-month:

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