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Globe and Mail
2 days ago
- Business
- Globe and Mail
Forget This 15.3%-Yielding Stock. Consider These High-Yield Dividend Growers Instead.
If you're looking for easy ways to pump up your passive income stream, you may have noticed some stocks out there offer dividend yields at double-digit percentages. One that gets a lot of attention is mortgage-focused real estate investment trust (mREIT) AGNC Investment (NASDAQ: AGNC). When markets opened on June 11, the stock was offering a 15.3% dividend yield. Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Learn More » AGNC's yield is so high that you could receive your entire principal back in the form of monthly dividend payments in less than five years. Of course, that's only if the company can maintain its payout. Prologis (NYSE: PLD) and Realty Income (NYSE: O) have been offering dividend yields that aren't half as high as AGNC Investment's. Despite the lower payouts up front, there's a good chance these two will deliver more passive income over the long run. A consistent dividend track record Income-seeking investors want consistency from their stocks, but not the sort of consistency they get from AGNC Investment. The mortgage REIT has lowered its dividend payout three times over the past 10 years. Instead of investing in real estate, AGNC Investment and its mREIT peers buy mortgage-backed securities (MBS). The mortgages in this mREIT's MBS portfolio are nearly always backed up by government agencies in the event of a default. Agency backing makes the portfolio somewhat resilient to economic downturns, but there isn't much the company can do about shifting interest rates. In a nutshell, mREITs borrow at relatively low short-term rates and use that capital to invest in MBS that pay higher rates over longer periods. It usually goes well, right up until the Federal Reserve rapidly alters interest rates. When interest rates rise, AGNC's short-term borrowing costs rise. At the same time, prices for existing securities in AGNC's MBS portfolio can plummet. AGNC Investment and mREITs, in general, employ a lot of leverage. When MBS values drop, the company can be forced to sell portions of its portfolio at fire-sale prices to boost liquidity and satisfy lenders. This is why, despite being a well-run business, AGNC is known for lowering its dividend payout, not raising it. The consistent gains investors want Shares of Realty Income and Prologis almost never fall so low that their dividend yields reach a double-digit percentage. Long-term investors who bought shares of either of these stocks, though, have outperformed folks who bought AGNC Investment by a mile. Despite a global pandemic, relatively stable interest rates made the past decade a relatively good time to be an mREIT. However, even if we add up dividends received over the past 10 years, long-term AGNC investors realized a disappointing 65.6% total return during the 10-year period ended June 10. Realty Income's stock price rose by less than 30% over the same 10-year period. If we include Realty Income's steadily rising dividend payments, though, the stock produced a 101.3% total return. Prologis' focus on logistics real estate, which e-commerce businesses rely on, served it extremely well during the COVID-19 pandemic. The company raised its dividend payout by a whopping 152.5% during the decade ended June 10. Thanks to all those payout bumps, Prologis investors outperformed the S&P 500 (SNPINDEX: ^GSPC) with an outstanding 272.9% total return. AGNC Dividend data by YCharts Why Prologis and Realty Income can keep winning Realty Income has been raising its dividend payout on a regular basis since it bought its first property in 1970. It became a publicly traded company in 1994, and its monthly dividend payment has risen every quarter since. Prologis doesn't have a dividend-raising streak as long as Realty Income's, but it hasn't had to lower its payout since 2009. Since 2013, its payout has grown every year like clockwork. At recent prices, it offers a 3.7% yield. Investors can confidently expect significant payout raises over the next several years from Prologis. With 95.2% of its 1.3 billion-square-foot logistics real estate portfolio rented out at the end of March, the net lease REIT won't have any trouble raising its dividend commitment in the quarters ahead. Management expects core funds from operations (FFO), a proxy for earnings used to evaluate REITs, to land in a range between $5.65 and $5.81 per share this year. That's more than enough to maintain and boost a dividend payout set at just $4.04 annually. Like Prologis, Realty Income is a net lease REIT that passes all the variable costs of building ownership to its tenants. With a retail portfolio full of convenience stores and other spaces that aren't particularly vulnerable to e-commerce, it boasted 98.5% occupancy at the end of March. At recent prices, Realty Income offers a 5.6% dividend yield that will almost certainly rise higher in the years ahead. The company expects adjusted FFO to land in a range between $4.22 to $4.28 per share this year. This is more than enough to maintain and raise a payout currently set at $3.22 per share. Prologis and Realty Income boast industry-leading credit ratings, which translates to lower borrowing costs than their peers. These REITs have been active for decades, but most companies still own most of the buildings they need to operate. With advantageous borrowing costs and a huge addressable market, these two leaders could continue their dividend-raising streaks for decades to come. Should you invest $1,000 in AGNC Investment Corp. right now? Before you buy stock in AGNC Investment Corp., consider this: The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and AGNC Investment Corp. wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years. Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you'd have $649,102!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $882,344!* Now, it's worth noting Stock Advisor 's total average return is996% — a market-crushing outperformance compared to174%for the S&P 500. Don't miss out on the latest top 10 list, available when you join Stock Advisor. See the 10 stocks » *Stock Advisor returns as of June 9, 2025 Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Prologis and Realty Income. The Motley Fool recommends the following options: long January 2026 $90 calls on Prologis. The Motley Fool has a disclosure policy.
Globe and Mail
6 days ago
- Business
- Globe and Mail
AGNC Investment: Its High Yield Looks Tempting -- Why the Stock May Be Ready to Rebound
AGNC Investment (NASDAQ: AGNC) has one of the highest dividend yields in the market, sitting at about 16%. But with a stock price that's steadily declined the past few years, investors are right to ask: Is the payout sustainable, and more importantly, is the stock a buy today? For those unfamiliar, AGNC is a mortgage real estate investment trust (mREIT) that owns agency mortgage-backed securities (MBS), primarily guaranteed by Fannie Mae and Freddie Mac. Because these securities are backed by government agencies, they carry virtually no credit risk. But AGNC's business is far from risk-free, and here's where the story gets complicated. Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Learn More » Why AGNC has struggled The biggest issue facing AGNC the past few years has been higher mortgage interest rates. There have been two main issues that have pushed up rates. One is that the Federal Reserve aggressively raised benchmark interest rates a couple of years ago to combat inflation. This resulted in mortgage rates also climbing. However, that was not the only reason mortgage rates shot up. Spreads between MBS yields and Treasury yields also began to significantly widen. During the COVID-19 pandemic, the Fed was a huge buyer of MBSs, driving down yields and narrowing the yield spread between MBS and Treasuries. However, after the pandemic, it stopped purchasing MBSs and began letting them roll off its balance sheet as they matured. About the same time, banks also began to back off buying MBS as bond prices fell, and the collapse of Silicon Valley Bank, which was heavily concentrated in long-duration MBSs, only pushed banks further away from the MBS market. During this period, the value of AGNC's MBS portfolio, as measured by its tangible book value (TBV), plunged. From the end of 2021 through the end of 2023, AGNC's tangible book dropped 45% from $15.75 to $8.70 per share. It has slipped a bit further since, and stood at $8.25 at the end of Q1 2025. Ultimately, where AGNC's TBV goes, its stock is sure to follow. What could turn things around? Despite the rough stretch that AGNC has seen, the setup for the stock now looks a lot more favorable. Fed Chairman Jerome Powell has signaled that more rate cuts could be on the table, and the Fed's own projections point to lower rates in the years ahead. That should be a much better environment for AGNC. Fed rate cuts could benefit AGNC in two main ways. First, it would likely reduce its short-term funding costs; AGNC tries to borrow money to invest in MBSs with longer maturities and higher yields. Second, lower rates could help increase its TBV by boosting MBS valuations. The past few years, the Treasury yield curve was inverted, which means that shorter-term Treasuries, like the two-year, had a higher yield than long-term Treasuries, like the 10-year. Not surprisingly, this is not a good environment for a company that generates its income from the spread between short- and long-term rates. Now, AGNC actively hedges out its funding costs to better align them with the duration of its MBS assets. However, it's not able to fully offset the pressure from an inverted curve over an extended period of time. With the yield curve flipping from inverted to positive (long-term yields being higher than short-term yields) late last year, though, AGNC stands to benefit from wider spreads. AGNC's portfolio is also well-positioned if MBS yields begin to fall. More than 80% of its holdings carry coupons of 6% or lower, which helps limit prepayment risk. Prepayment risk is highest when homeowners begin to refinance into lower-rate mortgages, forcing mortgage REITs to reinvest in lower-yielding MBS. Is the dividend safe? While high dividend yields are attractive, they can also be a warning sign. However, AGNC has maintained the payout through a very difficult environment, albeit sometimes at the expense of a lower tangible book value. It's not fair to say the dividend is completely safe, but if the yield curve continues to steepen, the dividend should become more sustainable. Is AGNC a buy right now? If MBS-to-Treasury yield spreads narrow from historically wide levels as banks or other institutions reenter the MBS market, AGNC could see a meaningful recovery in both its book value and share price. That's the best-case scenario. However, even if that doesn't play out, AGNC still has room to deliver solid total returns. The company pays a monthly dividend of $0.12 per share, which equates to a yield of about 16% based on recent prices for the stock. That dividend income alone puts it in a strong position to outperform in a market that seems to have stalled. With even a modest portfolio value recovery, AGNC could deliver annual 20% to 25% total returns during the next few years. Overall, I'd consider AGNC a high-risk, high-reward income play. However, the stock has already taken the brunt of the blow from higher interest rates and wide MBS-to-Treasury yield spreads, and the current environment may finally be turning in its favor. The wild card is whether historically wide MBS-to-Treasury spreads begin to narrow, because if they do, the upside could be significant. For investors who understand and are comfortable with the risks, AGNC offers a very high yield with strong potential upside. It's not a set-it-and-forget-it stock, but at current prices, it could be a smart investment for income-focused investors during the next few years. Should you invest $1,000 in AGNC Investment Corp. right now? Before you buy stock in AGNC Investment Corp., consider this: The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and AGNC Investment Corp. wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years. Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you'd have $674,395!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $858,011!* Now, it's worth noting Stock Advisor 's total average return is997% — a market-crushing outperformance compared to172%for the S&P 500. Don't miss out on the latest top 10 list, available when you join Stock Advisor. See the 10 stocks » *Stock Advisor returns as of June 2, 2025
