Billionaires Bet Big on This Nearly 15% Yielding REIT – But Should You?

Sujeet Kushwaha

Shares of AGNC Investment (NASDAQ: AGNC) offered a staggering 14.96% dividend yield at recent 2024 prices. This real estate investment trust (REIT) doesn’t actually own any real estate. Instead of collecting rent from tenants, it buys mortgage-backed securities that provide higher rates of return than its costs of capital.

The eye-popping yield likely inspired billionaire investors like Jeff Yass of Susquehanna to buy 1.4 million shares of AGNC in the third quarter of 2023. Yass wasn’t the only billionaire betting on this mortgage REIT – John Overdeck and David Siegel of Two Sigma Investments scooped up 1.2 million shares as well.

What Does AGNC Investment Do?

As its name implies, AGNC invests in mortgage-backed securities that are backed by a government agency in the event of a default. With the U.S. government guaranteeing each mortgage in the securities it purchases, incoming cash flows are generally reliable for AGNC.

Why the Big Yields and Billionaire Interest?

While AGNC’s incoming cash flows are typically stable, the company announced a comprehensive loss of $(1.02) per common share for Q3 2023, which comprised a $(0.68) net loss per common share and a $(0.34) other comprehensive loss (“OCI”) per common share on investments marked-to-market through. This was driven by rapidly rising interest expenses in 2022 and early 2023.

Most income-focused investors avoid AGNC stock and mortgage REITs in general because their interest expenses can spike for reasons outside of their control. For instance, rising interest rates can quickly lower the value of the mortgage-backed securities used as collateral by REITs.

With less collateral available, lenders could demand higher interest rates from mortgage REITs like AGNC. In a worst case scenario, collateral values falling too quickly could force AGNC to sell assets at fire sale prices to generate liquidity.

The Big Risks of Chasing Yields

Despite these risks, the huge nearly 15%+ dividend yields attracted billionaire investors like Yass and Overdeck in 2023. The opportunity for near term income likely outweighed the risks in their diversified portfolios.

However, everyday investors relying on stable passive income face substantial risks buying AGNC stock solely for the high dividend payouts. AGNC has already lowered its dividend by one-third over the past five years as interest rate risks increased.

What Could Happen in 2024 and Beyond

In 2024 and beyond, the outlook remains challenging for AGNC Investment. While interest rate hikes may slow, the impacts on mortgage REITs often lag shifts in monetary policy by 12-18 months. This suggests dividend cuts could continue for AGNC in 2024 if the collateral values of its securities remain under pressure.

Unless inflation and interest rates rapidly plunge, AGNC will likely struggle to maintain yields anywhere near its current levels. While the stock may have appealed to billionaire investors like Yass and Overdeck as part of a diversified portfolio, most regular investors are best served steering clear of the risks.

For everyday investors seeking reliable passive income streams, mortgage REITs like AGNC Investment represent substantial risks that often outweigh their tempting high dividend yields. While billionaire investors can afford to take risks, those relying on dividends for retirement income need stable and consistent payouts.

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Leveraging his government experience, Sujeet brings valuable insight on the stock market to readers. His passion for analysis drives coverage of equities and the latest financial news. When he's not busy dissecting stocks, Sujeet enjoys learning about new businesses and industries.
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