1 High Dividend Stock Set to Outperform

Dividends have historically been an extremely important factor in investors’ overall returns in the stock market, providing liquid income and creating opportunities for growth through reinvestment.

Today, though, soaring stock prices associated with expectations of high future growth have sent dividend yields well below their historical averages. The S&P 500 today yields just 1.2%, making it a less-than-ideal option for generating income.

Fortunately, there are still some extremely strong dividend stocks out there. Among these is AGNC Investment (NASDAQ:AGNC), a real estate investment trust with an exceptionally high yield.

AGNC invests in mortgage-backed securities and uses the interest it gains from those investments to pay its shareholders monthly distributions. Let’s take a look at AGNC and its shockingly high dividend.

Just How High Is AGNC’s Dividend?

As a REIT, AGNC offers a high yield because it’s required to pass 90% or more of its income to shareholders as dividends.

Even among REITs, though, AGNC’s dividend is impressive. The stock currently yields 14.9%, more than 12x the S&P 500 yield. This translates to a monthly payout of $0.12 per share.

It’s important to note that AGNC has also managed to sustain high yields over a long period of time, though its monthly payouts have been at their current level since 2020.

The stock’s current yield is roughly in line with the range it has occupied for the last couple of years, and the lowest the yield has gone in the last decade was about 7.5% in early 2021.

Can AGNC Deliver Price Appreciation as Well as Dividends?

While dividends are obviously the main selling point of AGNC shares, investors must also look at the stock’s ability to deliver returns through appreciation.

Analysts forecast a median target price of $10.50 over the coming 12 months, suggesting an upside of about 8.8% from the last closing price of $9.65.

For most stocks, this would be a respectable return but certainly nothing to write home about. When combined with a yield of almost 15%, though, AGNC has the potential to deliver outsized total returns if its shares appreciate even modestly.

Furthermore, AGNC doesn’t look bad from a valuation perspective. Shares are currently trading at 5.0x forward earnings, 3.1x sales and 1.1x book value.

The one concerning metric in the stock’s price is its EV/EBITDA ratio, which is quite lofty at about 23.8. With that said, the stock’s price seems reasonably in line with fair value and doesn’t appear too worrisome.

It’s also worth noting that institutional investors have been drawn to AGNC in the last year. Although institutional ownership still amounts to over 40% of the company, large investors have bought up about $730 million while only selling about $200 million of the stock in the last 12 months.

Institutional buying has also outpaced selling in every quarter except one since the beginning of 2022. Though income likely accounts for most of the institutional interest in AGNC, it’s also likely that Wall Street sees the stock rising in the coming years.

Will AGNC Share Price Fall?

Traditionally, high dividend yields are associated with high-risk stocks. There’s some truth here in AGNC’s case, as this REIT specializes in mortgage-backed investments. Mortgage REITs typically carry higher risks than equity REITs, as they can invest using leverage and are sensitive to changes in interest rates.

Right now, things look fairly good for AGNC. The company is generating enough net income to keep its dividend covered. In Q3, for instance, AGNC distributed $0.36 per share in dividends but earned $0.39 in net income.

That said, there are some risks that should be taken into account. To begin with, the company’s cash position is relatively small at $507 million. With over $79 billion in total liabilities, this cash reserve could prove a bit thin in the event of any major loss.

Mortgage REITs in general could also be in for a somewhat difficult period as interest rates continue to drop. Though the Fed is expected to slow down on rate cuts going into 2025, there’s still a good chance that baseline interest rates will gradually fall over the next year as long as inflation remains tamped down.

These lower rates could translate to an increase in mortgage refinancing, resulting in lower earnings from mortgage-backed securities going forward.

Overall, AGNC doesn’t look too risky right now. Investors who plan to buy and hold the stock, though, may want to consider that its dividend could go up and down over time.

Unlike blue-chip S&P 500 dividend stocks, mortgage REITs are apt to cut dividends when necessary and build them back up during good times. This happened to AGNC as recently as 2020, when the company had to cut back to its present dividend from $0.16 per month.

Is Now the Time to Buy AGNC?

While it’s important to understand the risks of mortgage REITs before buying one, there’s still a lot to like about AGNC.

The company has shown that it can maintain an extremely high yield over many years, and even cuts to its dividends have left it far above the income-generating capacity of the S&P 500. Even more importantly, the company is covering its dividend well with its earnings and doesn’t seem to be overextended.

One thing that should be recognized is that AGNC probably isn’t a great choice for dividend growth investors. Most blue-chip dividend stocks increase their payouts annually, allowing investors who buy and hold to realize larger and larger yields on their cost basis over time. That isn’t the case with AGNC, which tends to set a monthly dividend and stick to it for multiple years.

While growth investors may prefer to look elsewhere, AGNC has several advantages for investors seeking immediate income from their portfolios.

Between its high yield and monthly distribution schedule, AGNC could act as a source of cash for investors in or approaching retirement. Even though mortgage REITs can be a bit unpredictable, AGNC’s yield seems high enough to justify its risks and make it a reasonably good prospect for income-driven investors.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.